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What is a Coverdell Education Savings Account?

The Coverdell Education Savings Account (formerly called an Education IRA) is a nondeductible individual account that allows
$2,000 per year, plus earnings, to be accumulated for educational expenses. Contributions are allowed for each qualified child in a family. Distributions are both tax-free and penalty-free, if used in accordance with the account guidelines.

Who Can Contribute?

• Anyone can contribute on behalf of a child under age 18.
• A child can contribute to his or her own account.
• Contributors do not need to have earned income to contribute.
• Contributor’s modified adjusted gross income (MAGI), which is often the same as adjusted gross income (AGI), must fall within the
following limits:

MAGI Filing Status Contribution

$95,000 or less S, HH, QW, MFS Full
$95,000 - $110,000 S, HH, QW, MFS Partial
More than $110,000 S, HH, QW, MFS None
$190,000 or less MFJ Full
$190,000 - $220,000 MFJ Partial
More than $220,000 MFJ None

How Much Can Be Contributed?

• Up to $2,000 per year for any one child.
• Total maximum amount is $2,000, no matter how many individuals share in the contribution.
• All contributions must be in cash.
• A 6% excise tax penalty applies for contributions exceeding $2,000 for an individual unless the excess is withdrawn by June 1 of the following year and the earnings on the excess contribution are also withdrawn.

What Contributions Are Deductible?

Contributions to a Coverdell Education Savings Account are not deductible.

Deadline for Contributing
 
All contributions must be made by the due date (not including extensions) for the contributor’s tax return. For calendar-year taxpayers, the due date for contributions is generally April 15 of the
following year.

When Can Distributions Be Taken?

• At any time to pay qualified higher education expenses for a qualified child.
• Distributions must be made during the year in which the expenses occurred.
• Amounts withdrawn that exceed the amount for qualified education expenses are considered nonqualified distributions.

Academic Period

• Includes a semester, trimester, quarter, or any other designated period of instructional time.
• Begins on the first actual day of classes.
• Excludes orientation, counseling, or vacation periods.

Eligible Educational Institutions

• Any qualified elementary or secondary educational institution.
• Any accredited college, university, vocational school, or other accredited postsecondary educational institution deemed eligible to participate in a student aid program administered by the Department of Education.
• Includes most (but not all) accredited, public, nonprofit, and privately owned institutions.
• Institutions will be able to tell you if they qualify.

Qualifying Expenses for Elementary or Secondary Education

• Tuition, fees, academic tutoring, books, supplies, and other related expenses required for enrollment or attendance at an eligible educational institution.
• Room and board, uniforms, transportation, and supplementary items and services, including extended day programs that are required or provided by a public, private, or religious school in connection with enrollment or attendance.
• Computer technology and equipment or Internet access and related services, if used by the student and the student’s family during any
of the years the student is in school.

Qualifying Expenses for Post-Secondary Education

• Tuition, fees, books, supplies and equipment required for enrollment or attendance.
• Room and board for students enrolled at least half-time. Room and board expenses are limited to $2,500 if the student lives off campus and not at home.

How Are Distributions Taxed?

Qualified distributions are free of tax for both the principal and earnings distributed.

Nonqualified distributions are subject to tax on theearnings plus a 10% penalty unless they are made due to death, disability, or funding of a scholarship (payment to a state tuition program) for the beneficiary.

Upon the death of a beneficiary, a transfer of an account to the surviving spouse is tax-free. Other transfers are taxable events. Distributions must occur within 30 days after the death of the
account beneficiary.

Funds remaining in the account upon the beneficiary completing school or reaching age 30 may be withdrawn subject to tax and penalty, or rolled over to a Coverdell Education Savings Account for a member of the beneficiary’s family. Family members may include a son, daughter, step-son, step-daughter, brother, sister, father, mother, step-father, step-mother, nephew, niece, uncle, aunt, mother-in-law, father-in-law, brotherin- law, or sister-in-law.

Important Note

Eligible taxpayers can claim a Hope Credit or Lifetime Learning Credit in the same year they take a tax-free distribution from a Coverdell ESA,provided the distribution from the Coverdell ESA
is not used for the same expense for which the credit is claimed.

This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.

#848 – © Copyright May 2010
National Association of Tax Professionals
PO Box 8002
Appleton, WI 54912-8002
www.natptax.com

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