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Coverdell Education Savings Accounts (ESAs) are one of the most popular methods of saving for college. To help you fully understand how these accounts can be used to save for future tuition bills, the California Society of CPAs (www.calcpa.org) provides answers to some of the most frequently asked questions about these unique savings vehicles.
Previously called an Education IRA, a Coverdell Education Savings Account (ESA) is a trust or custodial account set up to pay for qualified educational expenses of the designated beneficiary.
A Coverdell account can be established for the benefit of a beneficiary under age 18. Once the beneficiary reaches age 18, you may no longer contribute to the account. This age limit does not apply to an individual with special needs.
If there are unused funds remaining in the account when the beneficiary reaches age 30, they must be withdrawn within 30 days. Again, the age limit doesn’t apply to special needs children. If the distributed funds exceed qualified education expenses, then part of the earnings included in the distribution is taxable in addition to a 10 percent penalty.
If you are unable to distribute the funds to the account beneficiary, you have another alternative. Unused funds can be rolled over into a Coverdell for another eligible family member of the beneficiary or it may be maintained by changing the designated beneficiary. This individual would also have until age 30 to use the funds for qualified education expenses.
You may contribute up to $2,000 per beneficiary each year to a Coverdell ESA. The maximum $2,000 contribution limit is phased out for single filers with modified adjusted gross income (MAGI) between $95,000 and $110,000, and for joint filers with between $190,000 and $220,000. No contribution is allowed once your MAGI reaches $110,000 for single filers and $220,000 for joint filers.
You have until the due date of your return (not including extensions) to make a contribution and have it apply to the previous year.
For students attending eligible colleges, universities and vocational schools, qualified college expenses such as tuition, fees, books, supplies, and reasonable room and board for a beneficiary who is at least a half-time student. The funds in a Coverdell ESA can also be used to cover the costs of attending elementary and secondary school, kindergarten through grade 12. In addition to tuition, these costs can include uniforms, tutoring, computers, software, and transportation.
You can contribute to both a Coverdell account and a Section 529 Plan in the same year. Be aware that there may be gift tax implications if you give more than $11,000 per beneficiary.
Any bank, brokerage firm or mutual fund company that handles traditional IRAs can help you set up and manage a Coverdell account. The money can be invested in stocks, bonds, mutual funds or certificates of deposit. Consult with a CPA if you have additional questions about Coverdell savings accounts.
