February 23, 2018

Answers To Questions On Coverdell Education Savings Accounts

Give your child the gift of education.


Q. What is a Coverdell Education Savings Account (CESA)?

A. Coverdell CESA’s were created to help you pay for your child’s education expenses, such as tuition, fees books, supplies, equipment and in some cases room and board. These options were improved by the Economic Growth and Tax Relief Reconciliation Act of 2001 and made permanent by Congress in January, 2013. (26 U.S.C. §530)

Q. How does a Coverdell CESA work?

A. Contributions to a Coverdell CSEA are never tax-deductable, however it can grow tax free offering you the potential for tax-free withdrawals including earnings.

Q. What happens if my child doesn’t use the funds?

A. If your child (the designated beneficiary of the ESA) decides not to go to college or leaves school before all the funds are withdrawn, you can roll unused funds into the Coverdell ESA of another child in your family. The beneficiary of the Coverdell CESA who receives the unused funds must he under the age of 30 (except that the age 30 limit does not apply to a special needs beneficiary).

Q. Who is considered a family member for the purposes of a rollover?

A. Family members of the designated beneficiary who are eligible to receive unused funds include (hut are not limited to) spouses, siblings, stepsiblings, nieces, nephews, first cousins, parents, aunts, uncles, grandparents, children and grandchildren Of course, some of these categories will he eliminated immediately, since the new designated beneficiary must be under the age of 30 at the time of the rollover (except that the age 30 limit does not apply to a special needs beneficiary).

Q. What if my child earns an academic scholarship and the tuition is waived?

A. The amount of scholarship money your child receives is deducted from the allowable expenses for the Coverdell ESA. For example, if qualified expenses total $6,000 and your child receives a scholarship for $3,000, you can make a qualified withdrawal of $3,000 from the Coverdell ESA. Remember that unused funds can always he rolled over into the Coverdell ESA of a family member.

Q. Can I roll funds from a traditional or Roth IRA into a Coverdell ESA?

A. No, rollovers from a traditional or Roth IRA into a Coverdell ESA are not allowed.

Q. How does the Coverdell ESA affect other education savings incentives?

A. Contributions can be made on behalf of the same child to both a Coverdell ESA and a qualified state 529 plan. A person can also receive tax free distributions from a Coverdell ESA in the same year he or she claims the Lifetime Learning or HOPE Scholarship tax credits, hut the same expenses cannot he used for more than one of these tax benefits.

Q. If I contribute to a Coverdell ESA, can I still contribute to a traditional or Roth IRA?

A. Contributions to traditional or Roth IRAs have no effect on the contributions you can make to each Coverdell ESA.

Q. Don’t traditional and Roth IRAs allow me to withdraw funds for education expenses?

A. Traditional and Roth IR.M do offer penalty free withdrawal’s for qualified higher-education expenses, hut you may still need to pay taxes on those withdrawals. In contrast, withdrawals from a Coverdell ESA are both tax-free and penalty-free if used for qualified education expenses.

Q. What is the deadline for making a Coverdell CESA contribution?

A. The deadline for making a Coverdell ESA contribution is the tax return deadline for the year for which the contribution is being made (usually April 15 of the following calendar year) not including extensions.

Q. Who is eligible to open and contribute the full amount to a Coverdell CESA?

A. You or the Grandparents can contribute the full amount if you(they) are:
• A single filer with Modified Adjusted Gross Income (MAGI) up to $95,000
• A joint filer with MAGI up to $190,000

Q. What happens if my (our) income is too high to make the full contribution to a Coverdell CESA?

A. You can make contributions of less than the full amount if you are:
• A single filer with MAGI between $95000 and $110,000
• A joint filer with MAGI between $190,000 and $220,000
If your income exceeds these amounts, you cannot make a regular Coverdell ESA contribution for that year.

Q. How long can I contribute to the account?

A. You can make contributions to a child’s Coverdell ESA until he or she reaches the age of 18. This age limit does not apply to special needs beneficiaries. This is a person who requires additional time to complete his or her education because of a physical, mental or emotional condition (including a learning disability).

Q. As a parent, am I the only one who can open and contribute to a Coverdell CESA for my child?

A. No. Anybody who meets the income requirements can open and contribute to your child’s Coverdell CESA. This includes grandparents, aunts and uncles, family friends and anyone else who wants to pitch in to your child’s education fund. Corporations, tax exempt organizations and other entities can also make Coverdell CESA contributions, and there are no income limits on these contributors. However, the total annual contributions to all Coverdell CESAs for each child can’t exceed $2,000 per year.

Q. Who controls the account?

A. Every Coverdell CESA must have one, and only one, “responsible individual” to oversee the account. This person decides when funds will he withdrawn and if and when funds will he rolled over to the Coverdell ESA of a family member. You can be the “responsible individual” as long as you are a parent or legal guardian of the child. The child can serve as the responsible individual after becoming an adult.

Q. When can I withdraw funds from a Coverdell CESA?

A. 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 education expenses for your child (the ESA’s designated beneficiary) before he or she reaches age 30 (except that the age 30 limit does not apply to a special needs beneficiary).

Q. What educational expenses are considered to be qualified?

A. Qualified education expenses include tuition, fees, books and equipment required for enrollment or attendance at nearly any postsecondary educational institution (public, nonprofit or proprietary). Certain room and board expenses also may qualify. Qualified expenses also include these same expenses for elementary and secondary education, and the purchase of computer technology or equipment that is used by the beneficiary and the beneficiary’s family while the beneficiary is in school.