How to Open a Coverdell ESA
The Coverdell Education Savings Account (ESA) was formerly known as the Education IRA. Named after the late Senator Paul Coverdell, a Coverdell ESA is easy to open. An adult usually controls the account until the beneficiary reaches the age of 18 (in most states). The adult can choose all of the investments, which comprise stocks, bonds, mutual funds or cash equivalents.
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Instructions
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Conduct online research about the benefits of the Coverdell ESA and determine whether you qualify. Income requirements apply for this type of savings account. Single adults must have a modified adjusted gross income of $95,000 or less, while joint filers must make $190,000 or less in total. Also, the $2,000 maximum yearly contribution for each account may not be high enough for aggressive savers.
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Visit the bank with which you conduct your local banking. Although this stop may lead you elsewhere, begin at a financial institution where you have a relationship with the staff. Ask questions about fees, commissions, choices of investments and other features offered. Determine whether the bank imposes a minimum deposit requirement to open the account. If you are unsatisfied with the program or features from your bank, take the time to do some research into brokerage firms or other banks until you find the program with which you are comfortable.
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Open the account. Visit the bank of your choice and complete the necessary application form. Many banks and firms offer an online application form, or you can request that the bank send the application form to you. The steps of the application process will most likely differ from bank to bank. The downloadable application form from Charles Schwab at www.schwab.com requires addresses, social security numbers, employment information and driver's license numbers. Along with the bank's application form, you will need to fill out IRS form 5305-EA, which includes an application and disclosure to establish the ESA and the name of the custodian and the administrator of the ESA. You will also fill out the Coverdell ESA Adoption Agreement (included in the 5305-EA) and the Fee Disclosures form.
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Fund the account with an initial deposit. An institution may require a minimum payment, for example, but may waive this payment if you set up automatic monthly transfers above a certain amount. If you opened the account online, you can usually set up the initial payment electronically or by mail.
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Tips & Warnings
You may roll over or transfer assets from another ESA.
You can add or withdraw funds at any time, tax free, for qualified educational expenses. Although college tuition may be the first priority, you can also use the funds for K--12 private schooling, books, computers, tutoring, uniforms and school supplies, among other expenses.
Coverdell ESAs not used by the time the beneficiary reaches 30 years old will garner a tax and a penalty.
Expect to pay a tax penalty if your Coverdell ESA contributions reach more than $2,000 in a year.
Contributions are not tax deductible, but they will grow tax deferred until withdrawn.
References
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