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Coverdell Education Savings Accounts

Coverdell Education Savings Accounts formerly called Education IRAs could only be used for “qualified higher education expenses.” These were expenses for tuition, fees, books, supplies and equipment required for enrollment or attendance of the designated beneficiary at an eligible post secondary educational institution.

Education Savings Accounts may also be used for expenses related to attendance at either a public or private elementary or secondary school. Qualifying expenses now include, in addition to those previously described:

  • Academic tutoring
  • Special needs services
  • Uniforms
  • Transportation
  • Educational computer technology or equipment and Internet access

Until withdrawn for such expenses, the earnings accumulate on a tax-deferred basis. When used for qualifying educational expenses, the earnings on an Education IRA are tax-free.

Contributions

The deadline for funding your 2013 Coverdell ESA is generally April 15, 2014.

Education Savings Accounts allow you to make annual non-deductible contributions of up to $2,000 on behalf of any child (referred to as a “designated beneficiary”) under age 18 to pay for certain qualifying educational expenses.

If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary.  For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return.

Frequently Asked Questions on Coverdell Education Savings Account

Q: For whom may a Coverdell ESA be established?
A:  A Coverdell ESA may be established for the benefit of any child under the age of 18.  Contributions to a Coverdell ESA are not permitted after the Designated Beneficiary reaches his/her 18th birthday. 

Q:  How much may be contributed to a Coverdell ESA on behalf of a Designated Beneficiary?
A:  The maximum contribution limit per year is $2,000 in aggregate contributions made for the benefit of any Designated Beneficiary.  Contributions may be made into a single Coverdell ESA or into multiple Coverdell ESAs for the benefit of any one Designated Beneficiary.


Q:  May contributions other than cash be made to a Coverdell ESA?
A:  No.  Coverdell ESAs are permitted to accept contributions made in cash only.

Q:  May contributors take a deduction for contributions made to a Coverdell ESA?
A: No.  Contributions to a Coverdell ESA are not deductible.  Therefore, contributions to a Coverdell ESA create “basis” in the account.  This means that any distributions that are not used for qualified education expenses are taxable only with respect to any earnings on the contributions.

Q:  May a Designated Beneficiary contribute to his/her own Coverdell ESA?
A:  Yes

Q:  Does a taxpayer have to be related to the Designated Beneficiary in order to contribute to the Designated Beneficiary’s Coverdell ESA?
A: No

Q:  Is the contributor to a Coverdell ESA required to have compensation or earned income in order to make contributions?
A:  No.  The contributor (whether an Individual or an entity) is not required to have earned income or compensation. 

Q:  What happens to the assets remaining in a Coverdell ESA after the Designated Beneficiary finishes his/her education?
A:  There are two options.  The amount remaining in the account may be withdrawn for the Designated Beneficiary.  The Designated Beneficiary will be subject to both income tax and the additional 10 percent tax on the portion of the amount withdrawn that represents earnings if the Designated Beneficiary does not have any qualified education expenses in the same taxable year he/she makes the withdrawal.  Alternatively, if the amount of Designated Beneficiary’s Coverdell ESA is withdrawn and rolled over (or transferred) to another Coverdell ESA for the benefit of an eligible member for the Designated Beneficiary’s family, the amount rolled over or transferred will not be taxable.

Q:  Rather than rolling over money for one Coverdell ESA to another, may the Designated Beneficiary of the account be changed from one Designated Beneficiary to another without triggering a tax?
A:  Yes, provided: (1) the terms of the particular trust of custodial account permit a change in Designated beneficiaries, and (2) the new Designated Beneficiary has not attained age 30 and is a member of the previous Designated Beneficiary’s family.  

Q:  May contributions be made to both a qualified state tuition program and a Coverdell ESA on behalf of the same Designated Beneficiary in the same taxable year? 
A: Yes. The excise tax prohibiting contributions to both a Coverdell ESA and a qualified state tuition program was repealed for 2002 and forward.  Therefore, contributions may be made to a Coverdell ESA on behalf of a Designated Beneficiary during the same taxable year in which any contributions are made to a qualified state tuition program on behalf of the same Designated Beneficiary. However, if distributions from a Coverdell ESA and a qualified state tuition program exceed the Designated Beneficiary’s qualified education expenses for the year, the Designated Beneficiary is required to allocate the expenses between the distributions to determine the amount includible in gross income, if any.   

This information provided herein is for reference only and does not purport to give tax or legal advice.  Please consult your tax or legal adviser for more information regarding this material. 

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