Coverdell Education Savings Account (ESA) Q&A
Here's some IRA information that could provide you with a rare benefit - a tax cut.
Q. What is a Coverdell Education Savings Account (ESA)?
A. The Taxpayer Relief Act of 1997 created the Education IRA, now known as the Coverdell ESA. Its sole purpose is to help you pay for your child's education expenses, such as tuition, fees, books, supplies, equipment, and in some cases, room and board and computers. These options were improved by the Economic Growth and Tax Relief Reconciliation Act of 2001.
Q. How does a Coverdell ESA work?
A. Unlike traditional IRAs, contributions to a Coverdell ESA are never tax-deductible. However, a Coverdell ESA offers you the potential for tax-free withdrawals - including earnings.
Q. What is the most I can contribute to a Coverdell ESA?
A. The total contributions each year to each child's Coverdell ESA cannot exceed $2,000. If you're eligible, you can contribute the full amount for each child. For example, if you have three children and each has his or her own Coverdell ESA, you can contribute $6,000 ($2,000 to each ESA).
Q. Who is eligible to open and contribute the full amount to a Coverdell ESA?
A. You can contribute the full amount if you are a single filer with modified adjusted gross income (MAGI) up to $95,000 or a joint filer with MAGI up to $190,000.
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 ESA for my child?
A. No. Anybody who meets the income requirements can open and contribute to your child's Coverdell ESA. 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 ESA contributions, and there are no income limits on these contributors. However, the total annual contributions to all Coverdell ESAs for each child can't exceed $2,000.
Q. When can I withdraw funds from a Coverdell ESA?
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 expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at nearly any post-secondary 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.
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. 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.
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For more details, call one of our IRA Specialists at: (800) 479-7928, or visit an RCU branch.
This article is not intended as tax advice. Please contact a tax professional.
