The Self-Directed Coverdell Education Savings Account (ESA)
The Coverdell Education Savings Account (named after its creator, Senator Paul Coverdell of Georgia) is a trust or custodial account created only for the purpose of paying the qualified education expenses of the designated beneficiary of the account. When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary.
The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Contributions are not tax deductible, but amounts deposited in the account grow tax free until distributed.
The account must be fully distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. If there is a balance in the Coverdell ESA at the time the beneficiary reaches age 30 or dies (if earlier), it must be distributed within 30 days. A portion representing earnings on the account will be taxable and subject to the additional 10% tax; however, the beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member who is under the age of 30.
To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Generally, any individual can contribute to a Coverdell ESA (including the beneficiary) whose modified adjusted gross income for the year is less than $95,000 - $110,000 ($190,000 - $220,000 in the case of a joint return). Distributions are tax free if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year.
ESA Contributions
- Limit - $2,000 per year, per child. The amount an individual can contribute is based on the following:
| Filing Status | Full Contribution for MAGI | Partial Contribution for MAGI between |
|---|---|---|
| Single | $95,000 or less | $95,000 - $110,000 |
| Married, filing jointly | $190,000 or less | $190,000 - $220,000 |
- Deadline - contributor's tax-filing due date, excluding extensions.
Qualified education expenses include:
- Qualified Higher Education Expenses - these are expenses related to enrollment or attendance at an eligible post secondary school and include such items as tuition and fees, books, supplies and equipment, and certain expenses related to room and board. For more detailed description of what constitutes qualified higher education expenses see IRS Publication 970
- Qualified Elementary and Secondary Education Expenses - these are expenses related to enrollment or attendance at an eligible elementary or secondary school and include such items as tuition and fees, books, supplies and equipment, academic tutoring, uniforms, transportation, expenses related to room and board, certain expenses related computer technology, equipment and/or internet access, and certain extended day programs. For more detailed description of what constitutes qualified elementary or secondary education expenses see IRS Publication 970.
If the amount you withdraw from your Coverdell account is greater than the qualified education expenses for that year, the beneficiary (student) has to pay income tax on the excess amount. In addition, the student will also have to pay a 10% additional tax on the amount of the distribution included in income, unless an exception applies to exempt the distribution form the 10% penalty. Among the permissible exception are:
- death;
- disablitliy;
- receipt by the student of a scholarship or fellowship;
- attendance of student at a U.S. military academy, such as West Point
For a full list of all the exceptions to the 10% penalty see IRS Publication 970.
Open a self-directed Coverdell Education Savings Account at Equity Trust.
- Definitions -
Contributor - Person making the contribution on behalf of a designated beneficiary.
Designated Beneficiary - The individual specified to receive the benefit of the funds on the Coverdell ESA. .
Responsible Individual - Generally, the designated beneficiary's parent or guardian who has the authority to request distributions, direct investments, and make other administrative decisions.
Modified Adjusted Gross Income (MAGI) - For most taxpayers, MAGI is the same as adjusted gross income (AGI) as determined on the taxpayer's federal income tax. However, in some cases, certain adjustments (modifications) to the taxpayer's AGI may apply. Contributors who need help determining their MAGI should see their professional advisers for assistance. The Worksheet 7-1 contained in IRS Publication 970 can be used to figure out your MAGI for Coverdell ESA purposes.
Eligible Elementary and Secondary Schools - The term school means any school which provides elementary or secondary education (grades K-12) as determined under state law. These could be public, private, or religious schools.
Eligible Higher Educational Institution - An eligible higher educational institution is any accredited college, university, vocational school, or other accredited post secondary educational institution eligible to participate in a student aid program administered by the Department of Education. This includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit making) post secondary institutions.
Click for more information IRS Publication 970 - Tax Benefits for Higher Education.