Formerly known as an Education IRA, a Coverdell Education Saving Account (ESA) is a tax-advantaged savings account created by the Taxpayer Relief Act of 1997 to pay for qualified education expenses for K-12, college, and trade school.
At West-Aircomm, we think education is a gift that keeps on giving. Research shows that both college-degree and trade-certificate holders earn more than high-school degree holders. While we know there’s no one path to financial success, education sets a strong foundation.
Let us help you set up an ESA account for your beneficiary. Your ESA contributions can help your student prepare for the cost of post-secondary education or access independent K-12 education to prepare them for college. You’ll set them off on the path to success and reduce the future debt burden for your student when you can cover expenses out of the ESA.
Your contributions are nondeductible, earnings are tax-deferred, and distributions are tax-free when they are used to pay for the account beneficiary’s qualified expenses for costs of kindergarten through 12th grade, college, or trade school. What better gift can you give to the next generation?
Coverdell ESA FAQs
Anyone, whether related to the account beneficiary or not, may contribute toward the combined maximum of $2,000 to a child’s ESA, provided their earned income is less than $220,000 (for married couples filing jointly) or $110,000 (for individual filers).
Proportionately smaller contributions are permitted for couples earning between $190,000 and $220,000 and for individuals earning between $95,000 and $110,000.
All distributions of earnings are tax-free and can be withdrawn at any time, either in total or partially as needed, if they are used for qualified education expenses. Any balance remaining in the account when the beneficiary turns 30 must be distributed or rolled over to a new account for the benefit of another family member. If the balance is not distributed or rolled over, the earnings portion is included in income and is subject to a 10% penalty tax.
Any one beneficiary (student) may have only $2,000 contributed on his or her behalf for any given year, regardless of the number of ESAs of which he or she is the beneficiary. Contributing to an ESA in no way affects your ability to contribute to your own traditional IRA or Roth IRA.
No. You can contribute any amount your budget allows. In fact, if you choose, you need not make any contributions in a given year.
No contributions are allowed after the account beneficiary reaches age 18. Contributions are permitted after age 18 for special needs children.
Any distributions of earnings not used for qualified education expenses are subject to taxes and a 10% penalty.
You can open or make contributions to your ESA any time up to and including the due date of your tax return for the previous tax year, normally April 15th.
No. Rollovers from a Roth or Traditional IRA to an ESA are not allowed.
Yes. As long as you are eligible, you may contribute up to the combined full amount allowed to a Roth and/or Traditional IRA and up to $2,000 to each of your children’s ESA annually.
An ESA must have one “responsible individual” to oversee the account. This person decides when funds will be withdrawn and if and when funds will be rolled over to the ESA of a family member. You can be the responsible individual as long as you are a parent or legal guardian of the child.
As the responsible individual, you can withdraw funds at any time. However, to avoid tax consequences from the withdrawal, you must use the funds to pay for qualified expenses for the ESAs designated beneficiary before he or she reaches age 30.
