Individuals can contribute to a Coverdell Education Savings Account to save for qualified education expenses.
Commonly referred to as Coverdell education savings account.
Do I Qualify for the Coverdell ESA?
A Coverdell Education Savings Account (ESA) can be used to save for qualified education expenses for a designated beneficiary. Earnings on contributions grow tax deferred, and qualified distributions are tax free.
2022 Coverdell ESA Details
A Coverdell Education Savings Account (ESA) is a trust or custodial account for a designated beneficiary to be used for qualified education expenses.
Coverdell ESA Contributions
Contributions to a Coverdell ESA are made with after-tax funds and are not deductible, but earnings are not taxed if withdrawals meet certain requirements. Coverdell ESAs must be held by a qualified institution, such as a bank or trust, and contributions can be made by individuals, corporations and trusts.
Annual contributions from individuals cannot exceed IRS limits per beneficiary, which are based on adjusted gross income (AGI). Organizations do not have an income threshold for contributions. Accounts must be established, and contributions made, prior to the beneficiary's 18th birthday. Excess contributions will result in tax penalties, similar to excess contributions for traditional IRAs.
Coverdell ESA Distributions
Qualified distributions can include postsecondary (e.g., college), elementary and secondary (e.g., high school) education expenses. Certain conditions must be met for these expenses to qualify for tax-free withdrawals.
All distributions must be made by the beneficiary’s 30th birthday. Unused funds within a Coverdell ESA can be transferred to a qualified family member's account for future use. Certain exceptions apply to special needs beneficiaries.
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• Earnings on contributions grow tax deferred, and any qualified distributions are tax free.
• Contributions and earnings can be used for education expenses other than postsecondary, potentially complementing other education savings strategies.
• Investment options are more flexible than other education savings alternatives.
• Contributions are not tax deductible and provide no immediate tax savings.
• Contribution limits are low, and the contribution window is shorter compared to alternatives.
• Excess contributions can be difficult to identify if multiple contributions are made from different individuals or organizations.
Assumptions When Taking the Coverdell ESA
• The entity holding the account is a qualified entity.
• Account documents are in writing and meet all IRS requirements.
• This tax strategy pertains only to contributions made and not distributions.
• None noted.
Requirements to Claim the Coverdell ESA
• Contributions must be in the form of cash and must not exceed the annual limits per beneficiary.
• The beneficiary must be younger than 18 when the contributions are made.
• The account funds cannot be invested in life insurance contracts.
• The account funds cannot be combined with other property, except for common trust funds or common investment funds.
• The account funds must be distributed within 30 days of the beneficiary's 30th birthday or notice of death.
Business Entities That Can Claim the Coverdell ESA
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.