Formerly called the Education IRA, the Coverdell Education Savings Account (ESA) is a type of tax advantaged savings account created specifically for paying qualified education expenses. Contributions are non-deductible, earnings are tax-deferred and distributions are tax free if used to pay for the account beneficiary's qualified expenses for costs of kindergarten through 12th grade, college or trade school. We recommend you consult your tax advisor regarding any important financial decision.
Below is a list of frequently asked questions. Click the question to see more information.
Key Features Of An Education Savings Account
Are Earnings Taxable?
Who is Eligible To Contribute To An Education Savings Account?
How Much Can I Contribute To An Education Savings Account?
Must I Contribute The Full Amount Each Year?
What Is The Age Limit For Contributions To An Education Savings Account?
Is There A Penalty If Funds Are Not Used For The Account Beneficiary's Education?
What Is The Deadline For Contributions?
Can I Roll Funds From A Roth Or Traditional IRA Into An Educational Savings Account?
If I Contribute To An Education Savings Account, Can I Still Contribute To A Traditional Or
Roth IRA?
When Can I Withdraw Funds From an Education Savings Account?
Who Controls An Education Savings Account?
Key Features Of An Education Savings Account
- $2,000 annual limit per beneficiary
- Contributions are non-deductible
- Qualified distributions are tax-free
- Virtually anyone can contribute.
- Contributions must stop at beneficiary's 18th birthday. Contribution permitted after age 18 for special needs children.
- Funds must be disbursed or rolled over by beneficiary's 30th birthday.
Savings Example: Debbie and Jim have decided to open an ESA for their one year old son,
Stephen, for his education expenses. If they contribute the maximum of $2,000 for each of
the next 15 years they would have a total of $49,344 (assuming 6 percent compounded
annually) for their son's qualified higher education. This distribution would be tax-free
and their cumulative contributions would amount to $30,000. What better gift could you give
a child than the gift of education? Open an Education Savings Account with us today and
enjoy the satisfaction that comes from knowing you have contributed to a brighter future.
Are Earnings Taxable?
All distributions of earnings are tax-free and can be withdrawn at any time, either in total
or partially as needed, if they are used for qualified education expenses. Any balance
remaining in the account when the beneficiary turns 30 must be distributed or rolled over to
a new account for the benefit of another family member. If the balance is not distributed or
rolled over, the earnings portion is included in income and is subject to a 10% penalty tax.
Who is Eligible To Contribute To An Education Savings Account?
Anyone - whether related to the account beneficiary or not - may contribute toward the
combined maximum of $2,000 to a child's ESA, provided their earned income is less than
$190,000 (for married couples filing jointly) or $95,000 (individual filers).
Proportionately smaller contributions are permitted for couples earning between $190,000 and
$220,000 and for individuals earning between $95,000 and $110,000.
How Much Can I Contribute To An Education Savings Account?
Any one beneficiary (student) may have only $2,000 contributed on his or her behalf for any
given year, regardless of the number of ESAs of which he or she is the beneficiary.
Contributing to an ESA in no way affects your ability to contribute to your own Traditional
IRA or Roth IRA.
Must I Contribute The Full Amount Each Year?
No. You can contribute any amount your budget allows. In fact, if you choose, you need not
make any contributions in a given year.
What Is The Age Limit For Contributions To An Education Savings Account?
No contributions are allowed after the account beneficiary reaches age 18. Contributions are
permitted after age 18 for special needs children.
Is There A Penalty If Funds Are Not Used For The Account Beneficiary's Education?
Any distributions of earnings not used for qualified education expenses are subject to taxes and a 10% penalty.
What Is The Deadline For Contributions?
You can open or make contributions to your ESA any time up to and including the due date of
your tax return for the previous tax year, normally April 15th.
Can I Roll Funds From A Roth Or Traditional IRA Into An Educational Savings Account?
No, rollovers from a Roth or Traditional IRA into an ESA are not allowed.
If I Contribute To An Education Savings Account, Can I Still Contribute To A Traditional Or Roth IRA?
Yes. As long as you are eligible, you may contribute up to the combined full amount allowed
to a traditional and or a Roth IRA and up to $2,000 to each of your children's ESA annually.
When Can I Withdraw Funds From an Education Savings Account?
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 expenses for
(the IRA's designated beneficiary) your child before he or she reaches age 30.
Who Controls An Education Savings Account?
An ESA must have one "responsible individual" to oversee the account. This person decides
when funds will be withdrawn and if and when funds will be rolled over to the ESA of a
family member. You can be the "responsible individual" as long as you are a parent or legal
guardian of the child.
