Topic Number 310 - Coverdell Education Savings Accounts

A Coverdell education savings account (Coverdell ESA) is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. This benefit applies not only to qualified higher education expenses, but also to qualified elementary and secondary education expenses. There are certain requirements to set up a Coverdell ESA:

  • When the account is established, the designated beneficiary must be under the age of 18 or be 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 it must meet certain requirements.

 

Contributions

You may be able to contribute to a Coverdell ESA to finance the beneficiary's qualified education expenses. Contributions must be made in cash, and they're not deductible. Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. Organizations, such as corporations and trusts can also contribute regardless of their adjusted gross income. Contributors must contribute by the due date of their tax return (not including extensions). There's no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.

Distributions

In 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 doesn't exceed the beneficiary's qualified education expenses. If a distribution exceeds the beneficiary's qualified education expenses, a portion of the earnings is taxable to the beneficiary. Amounts remaining in the account must be distributed when the designated beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Certain transfers to members of the beneficiary's family are permitted.

Additional Information

For information on contributions and how to determine the part of any distribution that is taxable earnings, refer to Chapter 7 of Publication 970.pdf, Tax Benefits for Education.