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What is it? – Coverdell Education Savings Account was created to help parents pay for children's education at any level, from kindergarten through high school and beyond.
Withdrawals from Coverdells are generally tax- and penalty-free, as long as they are used for "qualified" education expenses—meaning expenses for any elementary, secondary or postsecondary school. Virtually all public, nonprofit and privately owned for-profit schools are eligible.
But if withdrawals are used for nonqualified educational expenses, they are subject to ordinary income tax plus a 10% penalty on the earnings. Any balance remaining in the Coverdell must be distributed or transferred to another eligible family member when the beneficiary reaches age 30.
Financial aid – College savings plans can impact a student's eligibility for financial aid. Regardless of whether the Coverdell is owned by either the student or the parent, it's considered a parental asset, which generally has little impact on financial aid.
1 $10,000 limit applies separately to electronic Series EE and I bonds. $5,000 limit applies to paper Series I bonds.