Coverdell Education Savings Account

The Coverdell Educations Savings Account (ESA) is a trust or custodial account that provides individuals a tax-advantaged method to save up to $2,000 per year for a child's education - both elementary/secondary education (kindergarten through grade 12) and post-secondary education (college, graduate school, vocational school, etc.) - and may be established for the benefit of any child under age 18.

Contributions to a Coverdell ESA can be made any time after the birth of a child and may continue until the child's 18th birthday. Contributions will not be accepted after the child reaches his or her 18th birthday, unless the child is a special needs beneficiary (as defined by Treasury Department regulations).

There is no limit to the number of Coverdell ESAs that can be established designating a particular child as beneficiary; however, the total aggregate contributions to all accounts on behalf of a beneficiary in any year cannot exceed $2,000.¹

• Eligibility requirements

  You may contribute up to $2,000 annually to a child's Coverdell ESA if your modified adjusted gross income (see table below) is less than $95,000 as a single tax filer (or married filing separate), or $190,000 as a married couple filing jointly in the tax year in which you contribute. The $2,000 maximum contribution limit is gradually reduced if your modified adjusted gross income exceeds these limits.

  Anyone (including the child for whose benefit the account is established) may contribute to a child's Coverdell ESA , as long as his or her income falls within the income guidelines and the total of all contributions for one beneficiary does not exceed the $2,000 limit.

• Contributions

  $2,000 per child (designated beneficiary of the account), regardless of the number of accounts designating a particular child as beneficiary.

  Aggregate contributions for the benefit of a particular child in excess of $2,000 for a taxable year are treated as excess contributions. If the excess contributions (and the earnings attributable to them) are not withdrawn from the child's account(s) before June 1 of the following tax year, the excess contributions are subject to a 6% excise tax (reported on the beneficiary's tax return) for each year the excess amount remains in the account.

  Contributions may be made to both a Coverdell ESA and a qualified tuition program on behalf of the same designated beneficiary for the same taxable year.

  You can make annual contributions to a Coverdell ESA from January 1st through the tax-filing deadline (excluding extensions) for the year, generally April 15.

  The annual amount you can contribute to a Coverdell ESA is dependent on your modified adjusted gross income as determined on your federal income tax return. The following table should help you determine whether or not you are eligible to contribute to a Coverdell ESA:

  For Tax Year 2012	Modified Adjusted Gross Income
  Your Tax Filing Status	Full Contribution	Partial Contribution	Not Eligible
  Single/Head of Household*	Up to $95,000	$95,000 - $110,000	Above $110,000
  Married Filing Joint	Up to $190,000	$190,000 - $220,000	Above $220,000

• Tax Advantages

  Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed.

  All earnings in the account accumulate on a tax-deferred basis and can be withdrawn from the account tax-free if used to pay for qualified education expenses, such as tuition and fees, required books, supplies and equipment, and qualified expenses for room and board.

  The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits¹.

• Distribution Guidelines

  To avoid taxes and penalties on earnings, distributions must not exceed the amount of qualified education expenses for the year in which they are taken.

  Qualified education expenses include (1) qualified elementary and secondary education expenses, and (2) qualified higher education expenses. Qualified education expenses also include any contribution to a qualified tuition program on behalf of the designated beneficiary.

  Qualified elementary and secondary education expenses include expenses for:

  Tuition, fees, academic tutoring, special needs services in the case of a special needs beneficiary, books, supplies, and other equipment incurred in connection with the enrollment or attendance of the designated beneficiary as an elementary or secondary school student at a public, private, or religious school. (School means any school that provides elementary or secondary education [kindergarten through grade 12] as determined under state law).

  Room and board, uniforms, transportation, and supplementary items and services (including extended-day programs) that are required or provided by a public, private, or religious school in connection with enrollment or attendance.

  Expenses for the purchase of any computer technology or equipment, or to pay for Internet access and related services, are considered qualified education expenses if such technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in school (not including expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature).

  Tuition, fees, special needs services in the case of a special needs beneficiary, books, supplies, and equipment required for the enrollment or attendance of the designated beneficiary at an eligible educational institution.

  The cost of room and board is a qualified education expense if the designated beneficiary is at least a half-time student* at an eligible educational institution. The expense for room and board is generally limited to:

  • The school's posted room and board charge for students living on campus, or
  • $2,500 each year for students living off campus and not at home.

  * A half-time student is enrolled "at least half-time" if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled.

  An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the Department of Education. This category includes virtually all accredited public, nonprofit, and proprietary postsecondary institutions. (These same eligibility requirements for institutions apply for the Hope Scholarship Credit, the Lifetime Learning Credit, and early withdrawals from IRAs for qualified higher education expenses). The educational institution should be able to tell you if it is an eligible educational institution.

  If funds remain in the account after the beneficiary completes his/her post-secondary education or reaches the age of 30*, there are two available options to distribute the funds:

  The amount remaining in the account may be withdrawn for the designated beneficiary. The funds will be subject to both income tax and a 10% withdrawal penalty tax on the portion of the withdrawal that represents earnings.

  The designated beneficiary may roll over the full balance to a different Coverdell ESA for another family member, thus avoiding the taxes and penalty described above.

  * If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days.¹

  • ¹Internal Revenue Service