ESA Frequently Asked Questions
Who can contribute to a Coverdell Education Savings Account?
Contributions can be made by parents, grandparents, other relatives, friends, and the child for whom the account is established. Organizations, such as corporations, are also permitted to contribute to an ESA. Individuals making contributions to an ESA must have a modified adjusted gross income of less than $110,000 ($220,000 for joint filers).
Are Coverdell ESA contributions tax deductible?
All contributions are made with after-tax dollars and are not tax deductible. However, ESA distributions, including earnings, are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year.
What are the Coverdell ESA contribution limits?
Please see ESA Basics for current contribution limits.
What is the deadline for making contributions to my Coverdell ESA?
For a given tax year, contributions must be made on or before the federal tax filing due date (excluding extensions), which is usually April 15 of the following year. If you are making a contribution between January 1 and April 15, please be sure to specify the tax year to which it should be applied.
Is there an age limit for Coverdell ESA contributions?
Yes. Contributions must cease at age 18 unless the beneficiary is a special needs beneficiary.
Are businesses allowed to make contributions to an ESA?
Yes. Organizations such as corporations, non-profits, and trusts can make contributions to an ESA.
Can a child have more than one Coverdell ESA account?
Yes. The total annual contributions from all accounts must not exceed $2,000.
What counts as qualified education expenses?
ESA account withdrawals can be used to pay for qualified education expenses. These include expenses such as tuition, fees, supplies and equipment, room and board, and books. Qualified elementary and secondary school expenses include tuition, fees, academic tutoring, books, uniforms, room and board, computer technology, equipment, and internet access.
What is considered an eligible education institution?
Eligible education institutions include kindergarten, elementary, secondary, and postsecondary schools. Eligible postsecondary schools include virtually all accredited colleges, universities, and vocational schools, whether public, nonprofit, private, or for-profit. Eligible elementary and secondary schools range from kindergarten through grade 12 and include public, private, and religious schools.
When can the funds in my Coverdell ESA be withdrawn?
Distributions from your ESA may be made at any time. Distributions used for payment of the beneficiary's qualified education expenses are generally tax-free as long as they do not exceed the beneficiary's adjusted qualified education expenses for the year.
What happens if my ESA distribution is not used for a qualified education expense?
The earnings portion of an ESA distribution that is not considered to be for a qualified education expense will be included in the gross income of the beneficiary and may incur an additional 10% IRS tax penalty.
What happens to the remaining funds in an ESA when the beneficiary has completed his/her education?
Any funds remaining in the account may be withdrawn or rolled into another ESA. Earnings on an unqualified withdrawal would be subject to income tax and an additional 10% penalty. If the funds are rolled into a new ESA for the benefit of another family member, then the funds are not taxed. You may also change the designated beneficiary on the ESA to a member of the same family. In all cases the beneficiary must be under age 30.
Is there a certain age when the funds in an ESA must be distributed or transferred?
Generally the funds must be withdrawn or transferred by the age of 30 or the designated beneficiary's date of death. Special needs beneficiaries are not subject to the age restriction.
Will an ESA have an effect on my child's eligibility for financial aid in college?
Despite the tax advantages, lower- and middle-income parents who expect their child will be eligible for financial aid in college should think twice about taking advantage of Education Savings Accounts. This is because an ESA must be set-up in the child's name. In determining how much a family can afford to contribute to the cost of college, financial aid formulas count assets held in the child's name much more heavily than assets in the parent's name.
Need More Information?
Please refer to IRS Publication 970, Tax Benefits for Education.