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Coverdell Education Savings Accounts - ESA (formerly known as Education IRAs)

If you are looking for more investment choices when it comes to planning for college, you may want to consider the Coverdell Education Savings Account (usually called an ESA). ESA's are formerly known as known as Education IRAs and are another tax advantaged way to pay for college. Unlike 529 plans, you may invest in what you want when you want.  

 

What is an ESA?

According to the IRS, a Coverdell education savings account is:

A Coverdell education savings account1 is a trust or custodial account created or organized in the United States exclusively for the purpose of paying the qualified education expenses of an individual who is the designated beneficiary of the trust or custodial account. The account must be designated as a Coverdell ESA at the time it is created or organized in order to be treated as a Coverdell ESA for tax purposes. The governing instrument creating the trust must meet the requirements of section 530(b)(1).

 

IRS Requirements to set up a Coverdell ESA:

 

  • When the account is established, the designated beneficiary must be under the age of 18 or a special needs beneficiary.
  • The account must be designated as a Coverdell ESA when it is created.
  • The document creating and governing the account must be in writing and must meet certain requirements.

  

Advantages of Investing in a Coverdell ESA

              For more information visit www.irs.gov.

 

Income Restrictions4

  

Married Filing Jointly

$2,000 if modified adjusted gross income is less than $190,000 per year. Contributions are phased out for couples filing jointly with modified adjusted gross incomes between $190,000 and $220,000. Contributions are not allowed for couples filing jointly whose modified adjusted gross income is above $220,000. If your MAGI is $220,000 or more (if filing a joint return), you cannot contribute to anyone's Coverdell ESA.

Single Taxpayers

$2,000 if modified adjusted gross income is less than $95,000. Contributions are phased out if modified adjusted gross income is between $95,000 and $110,000. No contributions are allowed if modified adjusted gross income exceeds $110,000. If your MAGI is $110,000 or more, you cannot contribute to anyone's Coverdell ESA.

 

Organizations

Organizations, such as corporations can also contribute to ESA's and are not subject to income limits. 

 

Contribution Limits4

ESA's have two annual contribution limits:

  • If you meet the ESA income limits, you may give up to $2,000 to any one beneficiary.
  • For one beneficiary, the total of all contributions cannot exceed $2,000. This would also include contributions by all family members. A 6% excise tax is imposed on contributions exceeding contribution limits.

 

View other College Planning and Investment Options

1You must file Form 5498-ESA for each person for whom you maintained any Coverdell education savings account (ESA).

Form 5498-ESA     Instructions for Form 5498-ESA (HTML)     All Form 5498-ESA Revisions

General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G)

2In general, the designated beneficiary of a Coverdell ESA can receive tax free distributions to pay qualified education expenses. (IRS http://www.irs.gov/taxtopics/tc310.html)

3In general, the designated beneficiary of a Coverdell ESA can receive tax free distributions to pay qualified education expenses. The distributions are tax free to the extent the amount of the distributions do not exceed the beneficiary's qualified education expenses. If a distribution does exceed the beneficiary's qualified education expenses, a portion of the earnings is taxable. Amounts held in the account must be distributed when the designated beneficiary reaches age 30. Certain transfers to members of the beneficiary's family are permitted.   (IRS http://www.irs.gov/taxtopics/tc310.html)

4You may be able to contribute to a Coverdell Education Savings Account (ESA) to finance a beneficiary's qualified education expenses if your modified adjusted gross income is below the established amount. Contributions must be in cash and must be made by the due date of the contributor's tax return (not including extensions). There is no limit to the number of accounts that can be established for a beneficiary; however the total contribution to all accounts on behalf of a beneficiary in any year cannot exceed $2,000.00. The contribution is NOT deductible. (IRS http://www.irs.gov/taxtopics/tc310.html)

  

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Find out how Place Trade can help you get the most out of your college planning by visiting some of the links below:


Coverdell ESA

529 College Savings Plans

UGMA/UTMA Accounts

 

 

 

All investing involves risk, including the possible loss of principal and there can be no assurance that any investment strategy will be successful.