Coverdell Education Savings Account

What is a Coverdell Education Savings Account?

The Coverdell Education Savings Account is an incentive to help parents and students save for education. Up to $2,000 may be contributed to a child's Coverdell ESA each year. Earnings on contributions will be distributed tax free, provided that they are used to pay the beneficiary's elementary or secondary school or college education expenses.

Who can contribute to an ESA?

Any individual who meets adjusted gross income (AGI) requirements can make a non-deductible contribution on behalf of a child under the age of 18. The AGI requirements are $110,000 for single taxpayers and $220,000 for joint taxpayers. The $2,000 annual contribution limit is phased out for single taxpayers with AGI of $95,000 to $110,000 and for joint filers with AGI of $190,000 to $220,000. While a child may be the beneficiary of any number of Coverdell ESAs, the total contributions for the child during any tax year cannot exceed $2,000.

Is a contribution to an ESA tax-deductible?

No, contributors may not take a tax deduction for contributions made to an ESA, but amounts deposited in the account grow tax free until distributed.

Are the funds subject to taxation when they are withdrawn?

Distributions are tax-free as long as they are used for qualified education expenses, such as tuition, books, fees, etc., at an eligible educational institution. This income exclusion is not available for any expenses for which the Hope Credit or the Lifetime Learning Credit is claimed for that student. If the distribution exceeds education expenses, a portion will be taxable to the beneficiary and will be subject to a 10% tax penalty. Exceptions to the penalty include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

For more information about the Coverdell ESA, check out IRS Publication 970 — Tax Benefits for Higher Education.