Resources
- IRS Publication 970, Chapter 7 – Coverdell Education Savings Account (ESA)
- 2015 Form 1099-Q: Payments from Qualified Education Programs
Why YOU Should Care
If your modified adjusted income is below the annual limits, you may be able to contribute to a savings account to fund qualified education expenses for a designated beneficiary. Amounts in the account grow tax-free until distributed.
What is a Coverdell Education Savings Account (ESA)?
A Coverdell ESA is a savings account created to eventually pay the qualified education expenses of the designated beneficiary. It can be set up in the name of the beneficiary at any bank or IRS-approved financial institution that offers Coverdell ESAs. The account must be designated as a Coverdell ESA when initially established.
Who can contribute to a Coverdell ESA? How much?
You qualify to establish a Coverdell ESA if your modified adjusted gross income in 2015 is less than $110,000 (or $220,000 if filing jointly). Contributions must be made by the due date of the tax return for the year in question (i.e., by April 15, 2016, for the 2015 tax year).
While a single beneficiary may have several Coverdell ESAs in his or her name, the annual limit for total contributions across all accounts is $2,000.
Who can be a “designated beneficiary”?
The designated beneficiary is the person for whom the Coverdell ESA is intended to assist with future educational expenses.
When the account is established, the beneficiary must be under 18 years old or considered a special needs beneficiary. Contributions can be made in the name of this beneficiary until they reach 18 years of age. There is no upper age limit for special needs beneficiaries.
The account can be rolled over into another Coverdell ESA to benefit a member of the beneficiary’s family if there are funds remaining once education is completed. The new beneficiary must be under age 30 or considered special needs.
What are “qualified education expenses”?
Funds from the Coverdell ESA must be used to pay qualified education expenses at an eligible educational institution.
Eligible Institution
A college is an “eligible educational institution” if it is eligible to participate in a student aid program administered by the U.S. Department of Education. This includes almost all accredited universities.
Unlike some other college savings plans, funds from a Coverdell ESA may also be used to pay for qualified elementary or high school education expenses in addition to paying for college, if needed. In these cases, an eligible educational institution is any public, private, or religious school with state accreditation.
In all cases, if you have questions about whether or not the institution qualifies for use of Coverdell ESA funds, ask the institution in question as they should be aware of their eligibility status.
Qualified Expenses
For college, qualified expenses are the costs associated with attending an eligible institution. This includes tuition, fees, books, supplies, and equipment. Room and board qualifies to the extent it does not exceed the actual cost billed to the student by the school or the allowance for room and board determined by the school.
The student must be enrolled at least half-time to qualify to use funds from a Coverdell ESA.
For elementary and high school, qualified expenses include all the items above plus tutoring, uniforms, and transportation, if applicable.
What happens when funds are distributed?
Distributions from a Coverdell ESA are tax-free to the extent they cover qualified education expenses. If a beneficiary takes a distribution in excess of his or her qualified education expenses for that year, the amount of excess distribution that represents tax-free growth on the account is taxable income. This amount may also be subject to a 10% additional tax depending on the circumstances of the distribution.
Any funds remaining unused in the account must be distributed by the time the beneficiary reaches age 30.
