What is a Coverdell Education Savings Account (ESA)?
Named Education IRAs when first established in 1998, these accounts were renamed Coverdell Education Savings Accounts (ESA) in 2001. The ESA is a tax-favored account for the purpose of saving for education expenses. ESAs allow contributions for any child under age 18, and tax-free distributions for a broad variety of education expenses up until age 30.
Annual contributions to the ESA may not exceed $2,000 (eligible contributions may be less if the taxpayer's income exceeds certain thresholds). All contributions must be in cash. Like an IRA, an ESA will lose its tax-advantaged status if it is used in a prohibited transaction.
Coverdell ESA Eligibility
Any adult can establish a Coverdell ESA for any child under the age of 18. The person who controls the ESA is the custodian (sometimes referred to as the "responsible party") as named in the account agreement. The child, known as the designated beneficiary, does not have to be related to the person establishing the account.
Aggregate contributions that may be made by all contributors to one (or more) ESA established on behalf of any particular beneficiary are limited to $2,000 for each year. Corporations, tax-exempt organizations and other entities may make contributions to an unlimited number of parties' ESAs.
|Maximum income limits (AGI) for contributions to an ESA|
|Full contribution up to:||Contribution phased out up to:|
Contributions to an ESA may be made up to April 15th (the tax return due date, not including extensions) for a contribution to apply to the preceding year. Any contribution to an ESA is treated as a gift from the contributor to the beneficiary at the time of the contribution, meaning annual contributions are subject to the gift tax exclusion and are excludable for purposes of the generation-skipping transfer tax.
Excise taxes and/or penalties may apply to excess contributions made to ESAs. Contributions are considered excess when they are:
- More than a total of $2,000 per designated beneficiary per year;
- Made in a year when the contributor's adjusted gross income tops the limits for income eligibility;
- Contributed to a designated beneficiary who is 18 years of age or older;
- Made in violation of applicable rollover rules.
Excess contributions, if corrected prior to the tax filing deadline for the year in which the contributions are applied, will avoid related excise taxes and/or penalties.
Coverdell ESA Eligible Expenses
Distributions from your Coverdell Education Savings Account are tax-free provided that they are used to pay the beneficiary's qualified education expenses.
You may use your Coverdell Education Savings Account to pay for the beneficiary's elementary, secondary, and postsecondary expenses at virtually any accredited public, private, or religious school. Qualified education expenses include:
- Equipment required for attendance at the designated educational institution
Other expenses such as room and board, uniforms, transportation, computer-related expenses, and supplementary items (e.g., extended day programs) may also qualify. Additional exceptions are available to special needs beneficiaries. Qualified education expenses are reduced by the amount of any scholarships or financial aid received.
Please see IRS Publication 970, Tax Benefits for Education, for more information about qualified education expenses.
Coverdell ESA Distribution Rules
The account custodian may request a distribution at any time. Distributions, including earnings, are tax-free as long as they do not exceed the beneficiary's adjusted qualified education expenses. Some tax-free scholarships, fellowships, and grants may reduce the allowable amount of tax-free ESA distributions in a given tax year. Distributions in excess of the beneficiary's adjusted qualified education expenses are generally includable in the beneficiary's taxable income for the year, and may be subject to a 10% IRS tax penalty.
Once the designated beneficiary reaches age 30 (or upon the beneficiary's death), any remaining ESA balance must be distributed within 30 days. Alternatively, amounts remaining in an ESA may be rolled over into another ESA for the education of another beneficiary in the beneficiary's family. A change in beneficiary does not constitute a distribution if the new beneficiary is a member of the family of the original beneficiary.
Taxpayers may claim the HOPE Scholarship/American Opportunity Education Credit or the Lifetime Learning Credit in the same year that a tax-free distribution is made from an ESA. However, the distributions cannot cover the same education expense.
For more information about ESA distributions, including calculating adjusted qualified education expenses, please refer to IRA Publication 970, Tax Benefits for Education.
HOPE Scholarship Credit / American Opportunity Credit
While not part of the Education Savings Account, the HOPE Scholarship Credit (renamed American Opportunity Credit in 2009) does interrelate with the ESA. Taxpayers may be able to claim a nonrefundable HOPE Scholarship/ American Opportunity Education Credit against their federal income taxes. The credit is claimed for the qualified tuition and related expenses of each student in the taxpayer's family who is enrolled at least half-time in one of the first two years of post secondary education and who is enrolled in a program leading to a recognized educational credential. The maximum credit a taxpayer may claim for a taxable year is $2,500 multiplied by the number of students in the family who meet the enrollment criteria. The amount a taxpayer may claim is gradually reduced for taxpayers with modified adjusted gross incomes above $80,000 ($160,000 for joint filers), and phased out at $90,000 ($180,000 for joint filers). See IRS Publication 970 for more information.
Lifetime Learning Credit
The Lifetime Learning Credit also interrelates with the ESA. Taxpayers may be able to claim a nonrefundable Lifetime Learning Credit against their federal income taxes. The credit is claimed for the qualified tuition and related expenses of each student in the taxpayer's family who is enrolled in eligible education institutions. Unlike the HOPE Scholarship/American Opportunity Credit, students are not required to be enrolled at least half-time in one of the first two years of post secondary education. The amount that may be claimed as a credit is equal to 20% of the taxpayer's first $10,000 of out-of-pocket qualified tuition and other expenses for all the students in the family. The amount a taxpayer may claim is gradually reduced for taxpayers with modified adjusted gross incomes above $55,000 ($111,000 for joint filers), and phased out at $65,000 ($131,000 for joint filers).
Coverdell ESA Age Limit
The balance remaining in an ESA must be distributed within 30 days after a beneficiary reaches age 30. Also, distribution of the account balance of a deceased beneficiary must be made within 30 days after death of a beneficiary under age 30.
Open your Education Savings Account with Saturna and take advantage of:
Wide range of investment choices
- Saturna's affiliated no-load mutual funds offer a variety of investment objectives
- By investing in more than one fund, you can tailor your ESA to reflect your own risk and return objectives
- Add self-directed brokerage for access to stocks, ETFs, money market funds, and a broad array of unaffiliated mutual funds.
Knowledgeable, personalized service
- Investment ESA provider since 2003
- Trained representatives standing by to help you navigate the investment process
- Invest automatically from your bank account to your Saturna ESA
- Request redemptions to cover incurred expenses by telephone or in writing on any business day
- Choose redemption by check or direct deposit to your bank account at no charge
- Keep track of your portfolio with online account access
ESA Enrollment Checklist
- ESA Enrollment Form (and ESA Transfer Form, if transferring an existing ESA), completed and signed
- Form 5305-E, completed and signed
- A copy of your government-issued photo ID
- A check for your initial investment payable to the fund(s) of your choice
- If you wish to purchase non-Saturna affiliated mutual funds, stocks, or bonds, a separate check should be made payable to Pershing LLC for those purchases
- Be sure to indicate the tax year for which your are making the contribution
Is a Saturna ESA right for me?
It is important to review the features of Saturna's ESA and other ESAs before you decide where to establish your account.
A Saturna ESA may be right for you if:
- You want to minimize account-related fees
- You want to use your ESA as a long-term, tax-advantaged savings vehicle that can help pay the current or future education expenses of your child or other beneficiary
- You want to invest your ESA savings and desire a broad variety of investment options, such as mutual funds, ETFs, stocks, and bonds
- You are comfortable directing your own investments and have a tolerance for investment risk
Saturna's ESA Fees
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|Invested in Saturna's
affiliated mutual funds only
Saturna Brokerage ESA1
|Account Fees||Investments in mutual funds are subject to ongoing expenses that shareowners
pay indirectly. Please consult a fund's prospectus or summary prospectus.
|Account Maintenance||None||Potential inactive account fee2|
|Low Balance Fee||None||None|
|Contributions||None||Subject to Commission Schedule|
|Distributions / Withdrawals3||None||Subject to Commission Schedule|
|Outgoing wire transfers and overnight delivery
of proceeds from sales are subject to prevailing rates.
|Trades / Exchanges||None||Subject to Commission Schedule|
|Account Transfers||None||In: None4 Out: $75|
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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 Controbution Limits above 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.
¹ Self-Directed Brokerage ESAs may be subject to fees for services not listed in this chart. Please refer to the Saturna Brokerage Services Commission Schedule for more details.
² Inactive accounts have effected no trades from January 1 through December 31 and have had one or more security positions for the entire year, not including sweep account money market funds. Please see the Saturna Brokerage Services Commission Schedule for more details.
³ Withdrawals may be subject to income taxes if not used to pay qualified education expenses.
4 While Saturna does not have a specific charge for inbound transfers, the previous custodian may charge for the outbound transfer.