The education individual retirement account (IRA) was one of the first tax-advantaged, government-approved savings accounts for higher education. In 2002, the education IRA was renamed the Coverdell Education Savings Account (ESA), and its approved uses were expanded to include qualified elementary and secondary education expenses, in addition to higher education expenses. Annual contributions to a Coverdell account are limited to $2,000, and all funds must be paid out of the account no later than 30 days after the beneficiary reaches age 30.
Step 1
Verify that the education expense is approved. Allowable expenses include tuition, fees, books, equipment, supplies, room and board, computers, software, and Internet service. Unlike a 529 college savings plan, which only provides tax-free withdrawals for college or university expenses, Coverdell ESAs also allow withdrawals for kindergarten through 12th grade. You can use Coverdell withdrawals for public, private or religious schools.
Step 2
Subtract benefits from your total college expenses. If you received a tax-free scholarship or any type of similar assistance with your education expenses, you must deduct this amount from the total of allowable expenses that can be paid for with a Coverdell ESA.
Step 3
Time your expenses. You do not have to withdraw money from a Coverdell ESA and apply it immediately to education expenses. As long as the expense is incurred in the year in which you take a Coverdell distribution, the withdrawal is tax-free.
Step 4
Contact your financial adviser. Once you determine the exact amount of allowable expenses, ask for the funds from the custodian of your Coverdell account. Usually, you will have to provide your request in writing, indicating the purpose and amount of the distribution. Indicate whether you want the funds sent directly to the educational institution or to you personally.
Step 5
Empty the account before the beneficiary reaches age 30. Otherwise, you may owe income tax on the earnings of the account, plus a 10 percent penalty.
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