Coverdell Education Savings Account (ESA)
Coverdell Education Savings Accounts (ESA’s) allow taxpayers to set aside in an IRA-like account up to $2,000 a year toward a child’s college education.
Parents, grandparents, other family members, friends, and children themselves may contribute to the ESA so long as the total does not exceed $2,000 for the child for a taxable year. Although contributions to an ESA are not tax deductible, earnings on the account grow free of federal tax. Withdrawals from the account can be used to pay for room, board and tuition.
Here are common questions about Education Savings Accounts:
Are there any income restrictions on who may contribute to an ESA?
An individual may contribute up to $2,000 to a child’s ESA if the individual’s modified adjusted gross income for the taxable year is no more than $95,000 ($190,000 for married taxpayers filing jointly). The $2,000 maximum contribution per child is gradually reduced as income rises to $110,000 (single) or $220,000 (joint).
How many ESAs may a child have?
There is no limit on the number of ESAs that may be established for a particular child. However, in any given taxable year, the total aggregate contributions to all the accounts designating a particular child as beneficiary may not exceed $2,000.
Must a beneficiary be enrolled as a full-time student to make federally tax-free withdrawals from an ESA?
No. Whether a designated beneficiary is enrolled full-time, half-time, or less than half-time, he or she may take a tax-free withdrawal to pay qualified education expenses.
Is a distribution from an ESA taxable if it’s contributed to another ESA?
Not if it’s for the benefit of the same beneficiary or certain members of the beneficiary’s family (including the beneficiary’s children and their descendants, stepchildren and their descendants, siblings and their children, parents and grandparents, stepparents, and spouses of all the foregoing).
In addition, the $2,000 annual contribution limit to ESAs does not apply to these rollover contributions. For example, an older brother who has $2,000 left in his ESA after he graduates from college can roll the full $2,000 balance into an ESA for his younger sister who is still in high school, without paying any tax on the transfer.
Rather than rolling money from one ESA to another, may the designated beneficiary of the account be changed from one child to another without triggering a tax?Yes, provided 1) the terms of the particular trust or custodial account permit a change in designated beneficiaries and, 2) the new beneficiary is a member of the previous beneficiary’s family.
The information presented here does not constitute tax advice. State tax regulations may differ from federal tax regulations. Always consult your personal tax advisor before making any tax-related investment decision.