What Are The Basics Of A Coverdell Education Savings Account?

A Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for education expenses.

  • When the account is established, the designated beneficiary must be under the age of 18 or a special needs beneficiary.
  • The account must be designated as a Coverdell Education Savings Account when it is created.
  • The document creating and governing the account must be in writing and must meet certain requirements.

Coverdell Education Savings Contributions Guidelines:

  • The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established.
  • A beneficiary is someone who is under age 18 or is a special needs beneficiary.
  • Contributions to a Coverdell Education Savings Account are not deductible, but amounts deposited in the account grow tax free until distributed.
  • The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution.
  • This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
  • There are contribution limits for taxpayers based on the contributor’s Modified Adjusted Gross Income. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions

Distributions From Coverdell Accounts Guidelines:

  • Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board. 
  • There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Eligible institutions also include any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) post-secondary institutions are eligible.
  • The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell Education Savings Account, as long as the same expenses are not used for both benefits.
  • If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% 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 when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell Education Savings Account for another family member.

Learn More:

For more details, see IRS Publication 970, Tax Benefits for Higher Education (at IRS.gov) or call 800-TAX-FORM (800-829-3676).

Most of the information on this page was taken directly from the IRS website: http://www.irs.gov/newsroom/article/0,,id=107636,00.html

To learn more about setting up your Coverdell Education Savings Account, please contact our at office 1-866-7500-IRA(472) or [email protected].

If you are an American IRA Client and you have questions regarding the investment process, please contact our office at 1-866-7500-IRA(472) or [email protected].

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