The Best Time to Save for Education is Now
Whether they are in kindergarten or college, the cost of education is on the rise. A Coverdell Education savings account allows you to save for expenses like tuition, fees, books, supplies, equipment, and, in some cases, even room and board.
Using an ESA, individuals can make yearly nondeductible contributions on behalf of a child until that child reaches the age of 18*. The earnings accrued within the ESA remain tax-deferred. When the child uses the ESA funds to cover qualified education expenses, both the contributions and earnings are withdrawn tax-free.
Contributions to a child’s ESA can come from anyone (whether a family member or not), as long as that individual’s modified adjusted gross income (MAGI) falls within the applicable IRS limits.
- Table: MAGI Limits
- Single Filer: $95,000-$110.000
- Married, joint filer: $190,000-$220,000
Individuals with MAGI exceeding the limits are ineligible to contribute to an ESA for that particular year. Businesses also have the option to contribute, and they are not bound by MAGI restrictions. To determine if contributing to an ESA aligns with your financial situation, talk to us or seek guidance from a knowledgeable tax service provider.
Frequently Asked Questions
What is a Coverdell Education Savings Account (ESA)?
A Coverdell ESA is a tax-advantaged savings account designed to help families save for qualified education expenses, including K-12 and higher education costs—including tuition, fees, books, supplies, equipment, and, in some cases, room and board.
Who can contribute to a Coverdell ESA?
Parents, grandparents, relatives, and friends can contribute to a Coverdell ESA on behalf of an eligible beneficiary, but the maximum collective contributions (per beneficiary) cannot exceed $2,000 annually.
What is the maximum annual contribution allowed for a Coverdell ESA?
The maximum annual contribution limit is $2,000 per beneficiary. However, this amount is subject to income restrictions.
What is the annual deadline to contribute to a Coverdell ESA?
You have until the due date for filing your federal tax return to contribute to an ESA (typically April 15).
Are contributions to Coverdell ESAs tax-deductible?
No, contributions to Coverdell ESAs are not tax-deductible at the federal level. However, earnings in the account grow tax-free.
What are the income restrictions for contributors to a Coverdell ESA?
Contributors must have less than $190,000 in modified adjusted gross income or MAGI ($95,000 for single filers) in order to qualify for a full $2,000 contribution. The $2,000 maximum is gradually phased out if your modified adjusted gross income falls between $190,000 and $220,000 ($95,000 and $110,000 for single filers).
Can other types of assets be moved to an ESA?
Assets from IRAs, employer-sponsored retirement plans, and 529 plans cannot be rolled over to ESAs However, Military death benefit gratuities or Servicemembers’ Group Life Insurance payments may be rolled over to an ESA if completed within one year of receipt.
When can ESA assets be withdrawn?
Money can be withdrawn from a child’s ESA at any time, without restriction, and is tax-free if used for qualified education expenses.
What are qualified education expenses for an ESA?
For higher education, qualified education expenses include:
- Tuition, fees, books, supplies, and equipment required for enrollment.
- Room and board (subject to limits) for students enrolled half to full-time.
- Computer technology, equipment, internet access, and related services used during the years the student is enrolled.
Qualified elementary and secondary education expenses include:
- Tuition, fees, books, supplies, equipment, tutoring, and special needs services incurred in connection with enrollment and attendance.
- Room and board, uniforms, transportation, and supplementary items required or provided by school in connection with attendance or enrollment.
- Computer technology, equipment, internet access, and related services used by the student and student’s family during the years the student is enrolled.
Are there age restrictions for using Coverdell ESA funds?
Yes, funds must be used by the time the beneficiary reaches the age of 30. If not used for educational purposes, taxes and penalties may apply.
Who is considered an eligible beneficiary for the purposes of a transfer or rollover?
An eligible family member must be under the age of 30 and can be the original beneficiary’s spouse, parent, sibling, niece, nephew, aunt, uncle, child, grandchild, in-aw, or first cousin.
What happens if the beneficiary does not use all the Coverdell ESA funds?
If there are remaining funds after the beneficiary completes their education, the account owner can change the beneficiary to another eligible family member without incurring taxes or penalties. Any money remaining in the ESA when the beneficiary turns 30 will be distributed and taxable to the beneficiary.
Can multiple Coverdell ESAs be established for the same beneficiary?
Yes, multiple Coverdell ESAs can be established for the same beneficiary, but the total contributions from all accounts cannot exceed the annual limit of $2,000.
Contact us for more information. We would be happy to answer your ESA questions.
