What
is a Coverdell ESA?
A Coverdell (Education
Savings Account) ESA is a tax advantaged investment account created to encourage savings for the purpose of
paying the qualified education expenses of the designated
beneficiary of the account.
What
are some advantages of a Coverdell ESA?
Contributions to
a Coverdell ESA are not tax deductible, but amounts deposited
in the account grow tax free until withdrawn.
Generally, withdrawals
are tax free if they are used for educational purposes and
are not more than the beneficiary's qualified education expenses
for the tax year. Keep in mind, money in an ESA is not considered the child's (beneficiary's) money when applying for federal financial aid as long as the owner of the account is someone other than the beneficiary, such as a parent.
You can claim the
Hope or lifetime learning credit in the same year you take
a tax-free distribution from a Coverdell ESA, provided that
the distribution from the Coverdell ESA is not used for the
same expenses for which the credit is claimed.
You can make contributions
to a Coverdell ESA and a Qualified Tuition Program (QTP) in
the same year for the same beneficiary.
The designated beneficiary
can be changed to a member of the beneficiary's family. There
are no tax consequences, if, at the time of the change, the
new beneficiary is under age 30.
Who
can benefit from a Coverdell ESA?
Generally, when
the account is established, the designated beneficiary must
be under age 18. The designated beneficiary can be 18 or older
ONLY if he or she is a special needs beneficiary.
How
much can be contributed to a Coverdell ESA?
Any individual (including the designated
beneficiary for whose benefit the account is established)
may be able to contribute to a Coverdell ESA if their Modified
Adjusted Gross Income (MAGI) for the year is:
 | Less than $110,000 for a single individual, or |
| Less than $220,000 for a married couple filing a joint return. |
Contributions can be made to one
or several Coverdell ESAs for the same designated beneficiary
provided that the total contributions are not more than the
contribution limits for a year. The MAXIMUM
contribution limit for a Coverdell ESA is $2,000 a year.
Annual contributions can be made January 1st through the tax filing deadline (excluding extensions) for the year, generally April 15th.
Contributions CANNOT
be made after the beneficiary reaches age 18, UNLESS
the beneficiary is a special needs beneficiary.
When
can withdrawals be made from a Coverdell ESA?
The designated beneficiary can take
withdrawals at any time. Generally, withdrawals are tax free
if they are not more than the beneficiary's qualified education
expenses for the tax year. Qualified education expenses are
expenses required for the enrollment or attendance of the
designated beneficiary at an eligible educational institution.
The following are qualified education expenses:
| Tuition and fees |
| The cost of books, supplies, and equipment
| The cost of room and board if the designated beneficiary is at least a half-time student, which is also limited to one of the following:
 | The school's posted room and board charge for students living on campus |
| $2,500 each year for students living off campus and not at home |
| |
Withdrawals from a Coverdell ESA can also be used for qualified elementary and secondary education purposes.
Generally, a portion of the withdrawals is taxable to the beneficiary if the withdrawals are more than the beneficiary's qualified education expenses for the tax year. Also, if a taxable withdrawal is received, a 10% additional tax is imposed on the amount included as income. The 10% additional tax does not apply to withdrawals if:
| Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary |
| Made because the designated beneficiary is disabled |
| Made because the designated beneficiary received:
| A qualified scholarship excludable from gross income, |
| An educational assistance allowance, or |
| Payment for the designated beneficiary's education expenses that is excludable from gross income under any law of the United States
(only to the extent the withdrawal is not more than the scholarship, allowance, or payment) |
|
| Included in income only because the beneficiary waived the tax-free treatment of the withdrawal |
| A return of an excess contribution (and any earnings on it) made before the due date of the beneficiary's tax return (including extensions). If the beneficiary does not have to file a return, the excess (and any earnings) must be withdrawn by April 15th. The beneficiary must include in gross income for the year the contribution is made, any income earned on the excess contribution. |
The balance in the Coverdell ESA must be withdrawn in its entirety when either one of the following two events occur:
| The designated beneficiary reaches age 30. The designated beneficiary must withdraw the balance within 30 days after reaching age 30. (This does not apply if the beneficiary is a special needs beneficiary.) |
| The designated beneficiary dies before reaching age 30. The remaining balance must generally be withdrawn within 30 days after the date of death. |
Can
a Coverdell ESA be rolled over to a family member?
Any amount withdrawn from a Coverdell
ESA and rolled over to another Coverdell ESA for the benefit
of the same beneficiary or a member of the beneficiary's family
who is under age 30 is not taxable. An amount is rolled over
if it is paid to another Coverdell ESA within 60 days after
the date of the withdrawal. The beneficiary's spouse and the
following individuals (and their spouses) are members of the
beneficiary's family:
| The beneficiary's child, grandchild, or stepchild |
| The father, mother, grandfather, grandmother, stepfather, or stepmother of the beneficiary |
| A brother or sister of the beneficiary's father or mother |
| A son or daughter of the beneficiary's brother or sister |
| The beneficiary's son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law |
Please note: The above referenced information on Coverdell ESA's is only a brief summary of some of the IRS rules and regulations that apply to them. The National Slovak Society is not liable for any inaccuracies or misrepresentation in the above information. Please consult your tax advisor for any clarifications or questions regarding the above referenced information.
** Form Number AA-05. For New York, Form AA-05-NY. For New Jersey, Form AA-05-NJ.
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1-800-488-1890
