A Coverdell Education Savings Account (ESA) is a trust or custodial account used to pay for the qualified education expenses of the designated beneficiary of the account. Funds from an ESA may be used for expenses for a beneficiary in elementary (K-8th), secondary (9th-12th), or post-secondary school (higher education, vocational school, undergraduate or graduate degrees).
The contributor is not required to have earned income; however, contributions may only be made to ESAs by individuals whose modified adjusted gross income (MAGI) does not exceed these levels:
|Individual Returns (MAGI)||Joint Returns (MAGI)|
|Partial Contribution||$95,000 – $110,000||$190,000 – $220,000|
Distributions are tax- and penalty-free if they are not more than the beneficiary’s adjusted qualified education expenses for the year. A taxpayer is allowed to claim Hope & Lifetime Learning Credits for the same year an ESA distribution is made. However, the taxpayer cannot use the ESA distribution to cover the same educational expenses claimed for the Hope & Lifetime Learning Credit. If a withdrawal is not used for a qualified education expense, contributions will be distributed tax- and penalty-free; however, earnings will be subject to ordinary income tax and a 10%
early withdrawal penalty. Assets must be distributed once the beneficiary reaches age 30 (unless they are special needs).
The following items are considered qualified education expenses:
An ESA may roll over into another ESA for the same beneficiary. The beneficiary may be changed to another family member before that beneficiary reaches age 30. Also, a 60-day rollover may be completed with an ESA one time during every rolling 365 days.
Stifel does not provide tax advice. You should consult with your professional tax advisor regarding your particular situation.