Coverdell ESA

What is a Coverdell ESA? (formerly known as an Education IRA)

A Coverdell Education Savings Account (ESA), formerly known as an Education IRA, is an account that helps you save money for the cost of elementary, high school or higher education for a designated beneficiary. You can open multiple accounts on behalf of individuals under the age of 18 and make a non-deductible contribution as long it does not exceed $2,000 per child. Your ESA accounts will grow free of federal taxes and your withdrawals will also be tax-free if you meet the requirements as stated by the Federal Government. For more detail, please visit the IRS website regarding Coverdell ESA regulations.

What are the rules regarding contributions to a Coverdell ESA?

If your modified adjusted gross income (MAGI) is less than $110,000 (or $220,000 if filing a joint return), you may be able to establish a Coverdell ESA. Contributions of up to $2,000 in total can be made per child under the age of 18, no matter how many accounts have been established. Only cash can be contributed to a Coverdell ESA and the contributions must stop after the individual turns 18, unless he/she is a special needs beneficiary.

Are my contributions tax-deductible?

No, contributions to a Coverdell ESA are not tax deductible but will grow tax-deferred until withdrawn for elementary, high school or college expenses. If used for qualifying education expenses, they are withdrawn tax-free. If funds are withdrawn from the education IRA for purposes other than education expenses, any gains will be taxed and a 10% penalty may apply.

What expenses can the Coverdell ESA funds cover?

The following are some qualified education expenses for this type of education investment account. For more information, please visit the IRS website.

Qualified Education Expenses

  • Tuition and fees
  • Books, supplies, and equipment
  • Academic tutoring
  • Special needs services for a special needs beneficiary
  • Room and board
  • Uniforms
  • Transportation
  • Supplementary items and services (including extended day programs)

What is the deadline for opening and funding a Coverdell ESA?

The deadline to open and fund a Coverdell ESA is April 15th for any tax year.

How do I establish a Coverdell ESA?

Any bank, mutual fund company, or other financial institution that serves traditional IRAs is capable of serving as custodian of an ESA. Your cash contribution can be invested through the sponsoring institution--stocks, bonds, mutual funds, certificates of deposits, etc. There is no limit to the number of ESAs that can be established for any one child as long as the total contributions do not exceed $2,000 per year. If more than $2,000 is contributed to the education IRA in total, then the excess is subject to a 6% excise tax penalty. You can eliminate this penalty by withdrawing the excess amount before May 31st of the following year, otherwise it will be subject to penalties in subsequent years.


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