The trust or custodian is the party that establishes and controls the funds in the ESA for the student beneficiary, who must be under the age of 18 at the time of designation.
Coverdell ESAs may be opened with any investment brokerage institution who select a wide range of securities for the custodian to choose.
However, if the beneficiary receives an ESA distribution that exceeds his or her total qualified expenses in a given year, the excess is taxed as normal income.
Qualified expenses include, but are not limited to, tuition and fees, books and supplies, room and board, and some special needs services if required by the student.
Coverdell ESAs have many similarities and differences to a 529 Plan, another tax-advantaged investment account aimed at helping students pay for their education.
[10] ESAs also reduce federal government expenditures since savings assets such as Coverdell accounts typically lower the amount of financial aid a student is eligible to receive.
[12] The child's potential financial aid is increased compared to when the student is not a dependent and the account owner, because the expected family contribution will be 5.64% as opposed to 20%.