Coverdell Education Savings Accounts are a great way to save for a child’s future education expenses. This blog post covers the basics of how these accounts work.
Checkout this video:
What is a Coverdell ESA?
A Coverdell ESA is a trust account set up in the United States to pay for qualified education expenses of the designated beneficiary of the account. The account is created by a person, often a parent or grandparent, for the benefit of a child or grandchild. Assets in the account grow tax-deferred and distributions are tax-free if used to pay for qualified education expenses.
To be eligible to open and contribute to a Coverdell ESA, the account holder must be 18 years of age or older and have an incomes below $110,000 (or $220,000 if married filing jointly). There is no limit on the number of Coverdell ESAs that can be established for a beneficiary, but total contributions to all accounts established for a beneficiary cannot exceed $2,000 in any calendar year.
Qualified education expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance at an eligible educational institution. Eligible educational institutions include any elementary or secondary school as well as post-secondary institutions such as colleges, universities and vocational schools.
Coverdell ESAs can be used to pay for qualified education expenses at public, private or religious schools.
Who Can Contribute to a Coverdell ESA?
There are several rules regarding who can contribute to a Coverdell ESA. First, the account must be established for a child who is under the age of 18 (or has a disability). Second, the child’s parents, grandparents, or other relatives can establish the account – but not the child themselves. Finally, there is a contribution limit of $2,000 per year per child.
How Much Can Be Contributed to a Coverdell ESA?
The contribution limit for a Coverdell ESA is $2,000 per year, per beneficiary. However, the contribution limit may be less than $2,000 if the beneficiary’s modified adjusted gross income (MAGI) is above a certain amount. For tax year 2019, the MAGI phase-out range is $190,000-$210,000 for married couples filing jointly and $95,000-$110,000 for all other filers.
If the beneficiary’s MAGI is above the phase-out range, he or she can still contribute to a Coverdell ESA, but the contribution limit will be reduced. For example, if a single filer with a MAGI of $225,000 wanted to contribute to a Coverdell ESA for her nephew in 2019, she could only contribute $1,500 ($2,000 contribution limit minus $500).
When Can Withdrawals Be Made From a Coverdell ESA?
Contributions to a Coverdell ESA can be made until the beneficiary reaches age 18, as long as the contributions do not exceed the annual limit. Withdrawals from a Coverdell ESA can be made tax-free and penalty-free at any time for qualifying education expenses.
What Qualifying Educational Expenses Can Be Paid for With a Coverdell ESA?
Coverdell education savings accounts (ESAs) are tax-advantaged investment accounts that can be used to save for a child’s education expenses. These expenses can include qualified elementary, secondary, and post-secondary education expenses, as well as certain other expenses related to special needs education.
The Internal Revenue Service (IRS) defines qualified educational expenses as “tuition, fees, books, supplies, equipment, and other costs associated with enrollment or attendance at an eligible educational institution.” This definition can also include room and board expenses for students who are enrolled at least half-time.
Certain other expenses related to special needs education can also qualify for Coverdell ESA treatment. These expenses include fees for tutoring, therapy, and transportation that are required due to the beneficiary’s diagnosis of a learning disability.
Are There Any Tax Benefits Associated With a Coverdell ESA?
There are two tax benefits associated with a Coverdell ESA:
-The money in the account grows tax-free. This means that you won’t have to pay taxes on any interest or other earnings that the money in the account generates.
-You can withdraw money from the account tax-free as long as you use it to pay for eligible education expenses. Eligible expenses include tuition, fees, books, supplies, equipment, and room and board (if the student is enrolled at least half-time).
Are There Any Penalties for Withdrawals From a Coverdell ESA?
For the most part, you can withdraw money from your Coverdell ESA penalty-free as long as the withdrawals are used to pay for qualified educational expenses. However, there are a few situations where you may be subject to a penalty.
If you withdraw money from your Coverdell ESA for reasons other than paying for qualified educational expenses, you will generally be subject to a 10% penalty on the amount withdrawn. Additionally, any earnings that are withdrawn will be taxed as income.
There are a few exceptions to this rule. For example, if you withdraw money from your Coverdell ESA because you have suffered a disability or died, you may be able to avoid the 10% penalty. Additionally, if you are withdrawing money to pay for qualified higher education expenses (such as tuition and fees) for yourself, your spouse, or your dependent, you may also be able toavoid the 10% penalty.
If you have any questions about whether or not you will be subject to a penalty for withdrawing money from your Coverdell ESA, you should consult with a tax advisor or financial planner.
How Do I Open a Coverdell ESA?
Coverdell Education Savings Accounts (ESAs) are one way to save for a child’s education, and they offer some unique benefits. Here’s what you need to know about how to open a Coverdell ESA.
A Coverdell ESA is an account that grows tax-free and can be used to cover qualifying educational expenses for a designated beneficiary. To open a Coverdell ESA, you’ll need to choose a financial institution—such as a bank, broker, or mutual fund company—that offers them.
When you open the account, you’ll name a beneficiary— typically a child under the age of 18 (or up to age 30 for certain disabled beneficiaries). You can change the beneficiary later if necessary. Coverdell ESAs can have only one designated beneficiary at a time, but there’s no limit on the number of ESAs that can be opened for each beneficiary.
You can contribute up to $2,000 per year per beneficiary (and catch-up contributions of an additional $500 are allowed for beneficiaries age 50 and older). Contributions must be made in cash; you cannot contribute stocks or other assets. And unlike some other types of education savings accounts, there are no income limits for contributors to Coverdell ESAs.
The money in your Coverdell ESA can be used tax-free for qualifying educational expenses at eligible institutions, including elementary and secondary schools as well as colleges and universities. Qualifying expenses include tuition, fees, books, supplies, equipment, and room and board (for students who are enrolled at least half-time). Withdrawals can be taken starting when the beneficiary is age 18 (or age 14 with special needs), but must begin by the time the beneficiary reaches age 30. If the money isn’t used by then, it must be withdrawn and any earnings will be subject to taxes and penalties.