Coverdell Education Savings Account FAQs

4. What are the CESA contribution limits?

The contribution limit for a Coverdell Education Savings Account is $2,000 per year, per child (i.e. beneficiary).

According to the IRS, there may be a reduced limit depending on your MAGI. If your MAGI is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced. If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you can’t contribute to anyone’s Coverdell ESA.

A common question is, “Can I set up a CESA for my child or grandchild and then have an aunt or uncle set up a CESA, or other relative and have each person contribute 2,000?”

Regardless of the number of CESAs opened for the beneficiary the maximum contribution per year, per beneficiary is $2,000, until the child (beneficiary) reaches the age of 18, even if you have more than one contributor. There are some exceptions to those rules for special needs beneficiaries.

5. Are contributions to a Coverdell Education Savings Account tax-deductible?

No – Contributions to a CESA are not tax deductible. Individuals contribute to a Coverdell ESA with after-tax dollars, but those contributions can then grow tax-free through potential profits from the investments that you’re making. When money is withdrawn to pay for qualified education expenses, it’s tax-free.

6. Are there income limits associated with CESAs?

Yes – There are what’s referred to as Modified Adjusted Gross Income (MAGI) limits.

If you’re single in 2023, and you make between $95,000 and $110,000 MAGI, you can only make a partial contribution to a CESA account. This is what’s referred to as the phase-out range. As you get closer to that $110,000, you can only put a small fraction of the full $2,000 allowable limit on an annual basis.

Once your income is over $110,000, unfortunately you cannot contribute to a child or grandchild, or other family member’s Coverdell ESA.

If you’re married and filing jointly, and your MAGI is between $190,000 and $220,000 the contribution limits decrease and as you reach $220,000, you cannot contribute to a CESA.

Visit the IRS website for worksheets to help you determine MAGI and contribution limits.

7. When must assets be distributed from the account?

Assets must be distributed when the beneficiary turns 30 (rule doesn’t apply to a special-needs beneficiary).

If there’s a balance in the CESA 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-percent tax.

The beneficiary may avoid these taxes by rolling over the full balance to another beneficiary who is under the age of 30.

8. What’s the difference between a 529 savings plan and a Coverdell Education Savings Account?

Typically, with a 529 plan you get a tax deduction for making contributions to the plan, however, you’re restricted on the types of investments you can make with the funds.

Whereas with a Coverdell ESA, you can invest in just about anything as long as your following the rules and regulations associated with other self-directed accounts.

Can I have both a 529 and a Coverdell Education Savings Account?

Yes –You can have both a 529 and a CESA.

9. How do you open a Coverdell ESA?

To open a self-directed CESA at Equity Trust, you can speak with an IRA Counselor to walk you through the process to establish and fund the account, or you can  start the application online.