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Self-Directed Coverdell Education Savings Account (ESA)

IRA Financial Trust Company offers one of the country’s only self-directed Coverdell ESA accounts.  With Financial Trust Company, you can establish and fund a self-directed Coverdell while gaining the ability to invest in what you know, such as real estate, notes, private businesses, options, and even cryptocurrencies.

What it is

Formerly known as an Education IRA, a Coverdell Education Savings Account (ESA), is a federally sponsored, tax-advantaged trust or custodial account set up to pay for qualified education expenses. A Coverdell ESAs can be opened for any student who is under the age of 18 years. The assets, however, must be withdrawn by the time the student reaches the age of 30. Accounts for beneficiaries with special needs generally are not subject to the age restrictions on contributions and withdrawals.

How it works

Parents, grandparents, other relatives, friends, and the child for whom the account is being established can contribute to a Coverdell ESA. Since 2002, organizations, such as corporations, have also been permitted to invest in a Coverdell ESA. Contributions can be made by individuals with modified adjusted gross income of less than $110,000. For a couple filing a joint return, that amount is $220,000. For 2020, the annual contribution limits to a Coverdell ESA are limited to $2,000 per year, per beneficiary.

What it offers

Coverdell ESAs can be used only to pay for qualified education expenses. Qualified elementary and secondary school expenses include expenses for tuition, fees, and academic tutoring; special needs services in the case of a special needs beneficiary; books, supplies and other equipment; computer technology, equipment, and Internet access for the use of the beneficiary; and, in some cases, room and board, uniforms, transportation, and extended day programs.

The primary advantage of establishing a Coverdell ESA with IRA Financial Trust is that you will have the ability to use the funds to make alternative asset investments, such as real estate, notes, private business and fund investments, cryptocurrencies, and much more. Annual contribution limits to a Coverdell ESA are limited to $2,000 per year, per beneficiary. That means a family with a newborn would only be able to save about $44,000 in the 14 years until high school – just over half of the projected total average cost.  As a result, many individuals appreciate the opportunity to use the Coverdell ESA funds to invest in what they know and understand, such as real estate or hard money loans.

Our Products

1 | Checkbook Control Self-Directed Coverdell

The self-directed Coverdell LLC with “checkbook control” also known as a checkbook Coverdell has quickly become the most popular vehicle for investors looking to make alternative assets investments, such as rental real estate that require a high frequency of transactions.

Under the checkbook Coverdell format, a limited liability company (“LLC”) is created which is funded and owned by the Coverdell and managed by the Coverdell holder. The “checkbook control” self-directed Coverdell allows one to eliminate certain costs and delays often associated with using a full-service Coverdell custodian.  The checkbook Coverdell LLC structure allows the investor to act quickly when the right investment opportunity presents itself cost effectively and without delay.

A “checkbook control” self-directed Coverdell LLC is popular with retirement investors seeking to invest in alternative assets, such as rental properties, fix and flips, tax liens, or cryptocurrencies that require a high frequency of transactions.

2 | Custodian-Controlled Self-Directed Coverdell

A custodian controlled self-directed Coverdell offers an HSA investor more investment options than a financial institution. With a custodian controlled self-directed Coverdell, a special Coverdell custodian will serve as the custodian of the self-directed Coverdell. Unlike a typical financial institution, most self-directed Coverdell custodians generate fees simply by opening and maintaining Coverdell accounts and do not offer any financial investment products or platforms. With a custodian controlled self-directed Coverdell, the Coverdell funds are generally held with the Coverdell custodian and at the Coverdell holder’s sole direction, the Coverdell custodian will then invest the Coverdell funds into traditional as well as alternative asset investments, such as real estate.

A custodian controlled self-directed Coverdell is popular with retirement investors looking to invest in alternative assets which do not involve a high frequency of transactions, such as the purchase of raw land or private fund investments.

Checkbook Controlled

$360 annual IRA custodian fee

  • One low flat fee
  • No ongoing transaction fees
  • No account value fees
  • Fee is deducted from your account upon set-up
  • Fee is deducted in quarterly installments of $90 beginning the following calendar year

Custodian Controlled

$360 annual IRA custodian fee

  • Quick and Cost Effective Custodial Services
  • No account value fees
  • Fee is deducted from your account upon set-up
  • Fee is deducted in quarterly installments of $90 beginning the following calendar year

All our Self-Directed IRA clients benefit from a flat annual IRA custodial fee, irrespective of account value. This is because we want all our clients to accurately report the value of their IRA accounts without being concerned that they might pay higher account value fees.

Coverdell ESAs: Important Terms

Coverdell Withdrawals

Coverdell ESA distributions may be made at any time. As long as the distribution is applied to payment of the qualified education expenses of the designated beneficiary, it will generally not be considered taxable income for the beneficiary. Coverdell ESA assets generally must be used before the student reaches the age of 30 years. (Special needs beneficiaries are not subject to any age restrictions.) At that point, the funds will be distributed to the beneficiary, and the earnings portion generally will be considered taxable income of the beneficiary. To avoid this, the funds in a Coverdell ESA may be rolled over into a Coverdell ESA for another eligible family member before the primary beneficiary reaches age 30.

Prohibited Transactions

The Internal Revenue Code does not describe what a Self-Directed Coverdell can invest in, only what it cannot invest in. Internal Revenue Code Sections 408 & 4975 prohibits Disqualified Persons from engaging in certain type of transactions. The purpose of these rules is to encourage the use of retirement accounts for accumulation of retirement savings and to prohibit those in control of retirement accounts from taking advantage of the tax benefits for their personal account. 

In general, so long as one does not use the Coverdell funds to buy life insurance, collectibles, or engage in any transaction that directly or indirectly involves or benefits a disqualified person, the transaction will not violate the IRS prohibited transaction rules.

Tax Deferral

The concept of tax deferral is premised on the notion that that all income and gains generated by the pre-tax retirement account investment would generally flow back into the retirement account tax-free. Instead of paying tax on the returns of a self-directed Coverdell investment, such as real estate, tax is paid only at a later date, leaving the investment to grow unhindered.

Coverdell ESA contributions are not tax deductible, but, like a Roth IRA, amounts deposited in the accounts grow tax-free until withdrawn. Withdrawals from Coverdell ESAs generally are tax-free to the extent that the amount of the withdrawal is not more than the beneficiary’s qualified education expenses.

Our Services

The IRA Financial Advantage

The self-directed retirement experts at IRA Financial Trust will help you establish your self-directed Coverdell or “checkbook control” Coverdell quickly and easily.  Once your new Self-Directed Coverdell account has been established with IRA Financial Trust, we will assist you in rolling over your current retirement funds or make Coverdell contributions to your account.  All rollover and Coverdell contributions will be held with Capital One Bank, where you will receive FDIC protection of up to $250,000 of cash before the funds are invested in alternative assets at the client’s direction.

What We Offer

  • One low annual fee
  • No annual account asset fees
  • We handle all IRS reporting & administration
  • Invest in what you know and understand
  • Generate tax deferred growth in your Coverdell investments
  • Help diversify your retirement portfolio
  • Specialized in “checkbook control” self-directed Coverdell solutions
  • Expertise in cryptocurrency and ICO investments

It's easy—opening an account takes just minutes.

We're also here to answer questions! Don’t know which plan you qualify for? Have questions about a transaction? Our tax professionals will get back to you ASAP.

We can handle the process by phone, email, fax, or regular mail. To get started, fill out the form or call us at 1-800-472-0646. Our expert ERISA and tax professionals are on-site, which greatly reduces the set-up time and cost. You’ll be promptly assigned to one of them and they’ll help you get your self-directed retirement structure started.