Coverdell Education Savings Accounts: What You Need to Know

Make sure you are aware of exactly who controls a Coverdell ESA. There could be nothing worse than an 18 year old making all the wrong purchases after having found access to their education fund. This may be an exception, but it is something that could easily happen. Here are some ways to control a Coverdell ESA.

You keep complete control of a 529 plan as the account owner; you can even have the total value refunded to yourself. This is quite different from a Coverdell ESA - there is a responsible person (usually the parent or guardian) who administers the account for the sole benefit of the student. All money that is withdrawn from the ESA must go towards educational expenses for the child. No money can be refunded to the one who established the account. Coverdell accounts basically constitute an irrevocable gift.

The beneficiary of the Coverdell Education Savings Account is the child for whom it was established; they are obviously not of legal age when contributions were first made, so an adult (parent or guardian) is named as the "responsible person." This person usually retains that authority for the life of the account or at least until the student reaches 18 years of age, when the authority can pass to them.

With a Coverdell ESA, the responsible adult retains more control, preventing the child from using the funds for non-qualified purposes, than UTMA (Uniform Transfers to Minors Act) or UGMA accounts (Uniform Gifts to Minors Act). If the account still has funds when the beneficiary turns 30, the balance is paid to them within 30 days. Unless there is an authorization to change the beneficiary to a surviving family member, if the beneficiary dies, the account will be paid to their estate.