Coverdell Education Savings Account which is named after the late Senator Paul Coverdell is a tax exempt savings plan in the United States that promotes savings for expenses incurred towards education. It is also known as the Education Savings Account (ESA), Coverdell ESA, Coverdell account, or simply ESA. According to the legal definition under US Code Title 26, Coverdell Education Savings Account is a trust created or organized in the United States for paying the qualified educational expenses of a designated beneficiary of the trust.

• Under this Code, only contributions in cash which are made before the beneficiary attains the age of 18 and rollover contributions which would result in an aggregate contribution of more than $2000 in that taxable year are allowed. The fact that a Coverdell Education Savings Account also pays for elementary and secondary school expenses sets it apart from other similar savings strategies such as the 529 plan.
• Qualified educational expenses include those given under Section 529 (b) and the elementary and secondary school expenses elaborated in this law. Qualified educational expenses for elementary and secondary school expenses include expenses for tuition, fees, special needs services in the case of a special needs beneficiary, supplies, books, academic tutoring, and other equipment which are incurred in connection with the enrollment or attendance of the designated beneficiary of the trust as an elementary or secondary school student at a public, private, or religious school.
• Furthermore, expenses incurred for room and board, transportation, uniforms, and supplementary items and services (including extended day programs) which are required or provided by a public, private, or religious school in connection with such enrollment or attendance are also included in the trust. In addition to this, any expense incurred for acquiring computer technology, equipment or services used by the beneficiary or his family during the tenure of the tutoring or schooling which is used in connection with the schooling is also included.
• Although the Coverdell Account is similar to the 529 plan, there are numerous differences between the two. Coverdell savings allow any type of investment including, stocks, bonds, and mutual funds in contrast to the 529 plan where only investments in State run allocation programs are allowed. The maximum limit for Coverdell ESAs is $2000 per child, per year, whereas in a 529 plan there are no restrictions on the contribution up to the maximum lifetime contribution.
• The balance in the Coverdell ESA must be disbursed for qualified educational expenses before the beneficiary attains the age of 30 in order to avoid taxes and penalties. There is no such restriction under the 529 plan. Although it seems that a 529 plan is a better option, the major advantage of a Coverdell ESA is that it allows tax-free withdrawal of the amount if used for qualified educational expenses.
• The similarities between a 529 plan and a Coverdell ESA are that both allow the account owner to change the beneficiary at any time without incurring any penalty or tax. However, the new beneficiary should be an eligible family member of the previous beneficiary. Both plans consider the money to belong to the account holder and not the beneficiary. This is in case Junior decides to take a world tour instead of using it for college.
• There are advantages to both the 529 as well as the Coverdell ESA however as far as tax treatment is considered, Coverdell ESA are a much better option. On the other hand a Coverdell ESA is limiting in nature and cannot provide limitless wealth (which may be required) for higher education.

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