Coverdell Education Savings Account (ESA)

A Coverdell Education Savings Account (ESA), formerly called an Education IRA, is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the designated beneficiary of the account. It was created as an incentive to help parents and students save for education expenses. You can open a Coverdell ESA here at Members 1st.

The total contributions for the beneficiary (who is under age 18 or is a special needs beneficiary) of this account in any year cannot be more than $2,000, no matter how many accounts have been established. The beneficiary will not owe tax on the distributions if, for a year, the distributions from an account are not more than a beneficiary’s qualified education expenses at an eligible education institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.

Generally, any individual (including the beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross (MAGI) income is less than $110,000 ($220,000 if the individual is filing a joint return). The $2,000 maximum contribution per beneficiary is gradually reduced if the contributor's MAGI is between $95,000 and $110,000 ($190,000 and $220,000 if the contributor is filing a joint return).

Usually, MAGI for the purpose of determining your maximum contribution limit is the adjusted gross income (AGI) shown on your tax return increased by the following exclusion from your income: foreign earned income of U.S. citizens or residents living abroad, housing costs of U.S. citizens or residents living abroad, and income from sources within Puerto Rico or American Samoa. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

Distributions are tax-free as long as they are used for qualified education expenses, such as tuition, books, fees, etc., at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Refer to Publication 970 for more details. If the distribution exceeds education expenses, a portion will be taxable to the beneficiary and will be subject to an additional 10 percent tax. Exceptions to the additional 10 percent tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

If there is a balance in the Coverdell ESA at the time the beneficiary reaches age 30, it must be distributed within 30 days. A portion representing earnings on the account will be taxable and subject to the additional 10 percent tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member.

For additional information, please contact: Andy Steele 5000 Louise Drive, Mechanicsburg (717) 697-1161 ext. 228 steelea@members1st.org

Coverdell Education Savings Account (ESA) At-A-Glance

Tax Benefit

Earning on a Coverdell ESA grow tax-free until withdrawn to pay for qualified expenses.

• Withdrawals for certain qualified education expenses are tax-free
• Qualified education expenses include tuition, fees, books, computer equipment and technology required for elementary, secondary and post-secondary education
• A beneficiary may receive tax-free distributions from a Coverdell ESA in the same year he or she claims the Lifetime Learning or HOPE Scholarship tax credits
• No one can deduct contributions

Income Limits

You cannot contribute to a Coverdell ESA if your income is over $220,000 and you are married and file a joint return ($110,000 for single filers).
Anyone who has MAGI: (Modified Adjusted Gross Income from the Federal Tax Form)

• Up to $95,000 for single filers
Up to $190,000 for joint filers Some people with higher MAGI may be able to make smaller contributions Contributions not allowed after the beneficiary reaches age 18 (except for specials needs beneficiaries)

Designated Beneficiary

The designated beneficiary is the individual named in the document that creates the trust or custodial account who will receive the benefit of the funds in the account.

Qualified Expenses

Qualified education expenses are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution and include tuition and fees, the cost of books, supplies, and equipment, the amounts contributed to a qualified tuition program and, if the student is enrolled at least half-time, the cost of room and board. You can also use withdrawals from a Coverdell ESA for certain elementary and secondary education expenses.

• Withdrawals are tax-free and penalty-free only for qualified education expenses (earnings are subject to tax and penalty for most other withdrawals)
• Funds can be transferred from one child’s account to an account for another child in the family

Eligible Educational Institutions

Eligible educational institutions are any college, university, vocational school, or other post-secondary educational institution eligible to participate in student aid programs administered by the United States Department of Education and elementary and secondary education institutions.

Total Contributions Limit

There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary cannot be more than $2,000 no matter how many accounts have been established.

• $2,000 per child each year
• Limit applies to all Coverdell Education Savings Accounts (ESA) for the same child

Age Limit

Generally, when a Coverdell ESA is established, the designated beneficiary must be under age 18. The designated beneficiary can be 18 or older if he or she is a special needs beneficiary. Amounts in a Coverdell ESA must be withdrawn when the designated beneficiary reaches age 30.