What Students Qualify for Coverdell College Savings Plans?
Shopping Around to Open a Coverdell Education Savings Account
Section 529 and Coverdell Account Sunset Provisions

Investing Rules and Regulations for Coverdell College Saving Plans

Coverdell ESAs generally follow the same rules as traditional and Roth IRA accounts. Unlike 529 plans, there’s a lot that’s allowed, and not much that’s prohibited. Still, to keep everything kosher, you need to know what you can’t do and ways you can’t invest.

  • Your contributions need to be made in cash or cash equivalent.

  • You may not purchase collectibles or life insurance with the money in your Coverdell ESA. You’re prohibited from buying insurance policies, artwork, household furnishings, antiques, metals, gems, stamps, or certain coins with that money, no matter how fine an investment it may appear to you.

    Specially minted U.S. gold and silver bullion coins and certain state-issued coins may be permitted. In addition, platinum coins and certain gold, silver, platinum, or palladium bullion are also allowed. If you’re interested in making this sort of investment with Coverdell funds, check Internal Revenue Code Section. 408(m)(3) to make sure that the coins or bullion you have in mind qualify.

  • You may not mix Coverdell account funds with any other funds. Your Coverdell account needs to be set up and accounted for completely separately from any of your other assets. The custodian or trustee, however, has the ability to commingle the money in your Coverdell account with money in other Coverdell accounts, creating what’s known as a “Common Trust Fund” or a “Common Investment Fund.”

  • You may not pledge the value of a Coverdell ESA as collateral for any sort of loan. Not only are loans to you and your designated beneficiary prohibited, but so too are margin accounts, or brokerage accounts that allow you to borrow against the value of your stocks in order to either buy more stocks or take cash out of the account.

  • You may not take a loan from a Coverdell ESA, nor may your designated beneficiary. The money that’s in the account stays in the account until it’s time to make distributions to your beneficiary. Any money that comes out may only come out as a distribution. After it’s removed from the account, it may not be returned or repaid later.

  • You may not pay yourself or anyone else for managing your student’s Coverdell ESA by using funds from the account. The only fees that may be charged against the account are the custodian’s or trustee’s.

  • You may not sell or lease your property or your beneficiary’s property to a Coverdell account, nor may you make any other sort of asset exchange. The only thing that goes into the account is cash, and the only thing that should ever come out is cash, in the form of distributions to your beneficiary. Any other transaction is prohibited.

The custodian or trustee you choose to manage your Coverdell ESA may have other prohibitions in place. You may not be allowed to invest in real estate, for example, or trade in anything more complicated than ordinary stocks and bonds (as opposed to options, puts, calls, or the like).

The custodian may also limit you to a certain group of mutual funds or their own certificates of deposit. Investigate what limitations the custodian has in place before you open your account, and make sure that you can live within those rules.

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