Opening a Coverdell ESA is a good place to start to help the child in your life achieve a bright future. With a Coverdell, tax-free money for education can make a world of difference.
Use a Coverdell education savings account (ESA) to make annual non-deductible contributions on behalf of a child until they reach the age of 18*. The earnings generated will remain tax deferred while in the ESA. When the child uses money from the ESA to pay for qualified education expenses, the contributions and the earnings come out tax free.
Examples of qualified education expenses include any of the following while the child is enrolled in elementary, secondary, or post-secondary schools:
- Tuition and fees
- Supplies and equipment
- Room and board
- Special needs services
Modified Adjusted Gross Income Limits
- Single filer: $95,000 - $110,000
- Married, joint filer: $190,000 - $220,000
Who can contribute to the ESA?
Anyone. Family members or non-family members can contribute to a child’s ESA, as long as the contributor’s modified adjusted gross income (MAGI) falls below or within the income limits for the year. Those who are eligible to contribute may give to more than one ESA on behalf of multiple children, not to exceed the annual contribution limit of $2,000 (or less depending on MAGI) per child. Likewise, any one child may not receive more than $2,000 total per year in ESA contributions.
Using the ESA
If a child withdraws more from the ESA than the amount of their qualified education expenses for the year, the portion of the distribution beyond the education expenses is taxable. The child must include the earnings attributable to the excess distribution in their gross income for the year and pay a 10% penalty tax on the taxable earnings, unless a penalty tax exception applies (death or disability).
If a child does not use the ESA assets or does not transfer or rollover the ESA assets to an eligible family member by the time they reach age 30* the ESA is deemed distributed. The child must include the distributed amount in gross income for the year and pay a penalty tax on the earnings if the distribution is not used to pay for qualified education expenses.
ESA assets may be transferred or rolled over to a new or existing ESA for the same child, or to an eligible family member’s ESA. There is no limit on the number of transfers that can be done, but rollovers must be completed within 60 days of the distribution and may only occur once in a twelve (12) month period.
In addition, military death benefit gratuities or Servicemembers’ Group Life Insurance payments may be rolled over without taxation to an ESA within one year of receipt.
*The age 18 and age 30 limits do not apply to special needs individuals.
Eligible family members of child
(must be under age 30*)
- First cousin
- Aunt or uncle
- Niece or nephew
- Child or descendent of child, step-child, eligible foster child, or in-law
- Brother, sister, step-brother, step-sister, or in-law
- Father, mother, step-father, step-mother or in-law