Coverdell Education Savings Accounts
(Formerly known as Education IRAs)

With the rising cost of higher education, many families must plan to build a fund for their children’s college expenses. The Coverdell Education Savings Account was created solely for this purpose. It will help many families prepare for this financial challenge.

Taxpayers may deposit up to $2,000 per year into an Education Savings Account (“ESA”) for a child under age 18 (or a special needs student of any age). Parents, grandparents, other family members, friends, and a child him/herself may contribute to the child’s ESA, provided that the total contributions for the child during the taxable year do not exceed the $2,000 limit and the individual contributor’s income does not exceed certain limits. Corporations and other entities may make contributions without being subject to the income limits. Contributions may grow tax-free until distributed. The child will not owe tax on any withdrawal from the account if the child’s qualified education expenses for the year equal or exceed the amount of the withdrawal.

If the child does not need the money for education, the account balance can be rolled over to the ESA of certain family members who can use it for their qualified education expenses. Earnings allocated to amounts withdrawn from an ESA that exceed the child’s qualified education expenses in a taxable year are generally subject to income tax and to a penalty tax of 10 percent.

Anyone whose AGI is not in excess of $220,000 (joint returns) or $110,000 (single returns) may contribute on behalf of a designated beneficiary who has not reached the age of 18.

Establishment Deadline
Tax filing due date, no extensions.

Total Contributions
$2,000 per child per year. Contribution limit is phased out for AGIs from $190,000 to $220,000 (joint returns) and from $95,000 to $110,000 (single returns).

Deductible Contribution
Not permitted.

Non-deductible Contributions
Non-deductible contributions permitted. See “Total Contributions” for contribution limits.

Catch Up Contributions
No catch up contributions.

Contribution Deadline
Tax filing due date. No extensions.

Disclaimer: ABP does not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used, by taxpayers, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws.

Our college planning and education funding solutions are not financial planning (unless they are prepared using financial planning software approved ABP). As a brokerage service, they do not create an investment advisory or a fiduciary relationship (including under ERISA) between you and ABP.

Tax laws are complex and subject to change. This information is based upon current federal tax rules in effect at the time this was written. Individuals should always check with their tax or legal advisor before engaging in any transaction involving IRAs or other tax-advantaged investments. ABP does not render advice on tax and tax accounting matters to clients.