Coverdell Education Savings Account Plan Frequently Asked Questions
A Coverdell Education Savings Account (ESA) is sometimes called an Education IRA, but it is not an IRA. It is a trust that anyone can contribute to for qualified education expenses of a child, from elementary through college. While contributions are made using after-tax dollars, all earnings are free of income tax and penalties. And as long as no more than the maximum limit is contributed each year per child, any number of Coverdell ESAs may be opened for any number of children (grandchildren, nieces and nephews, you name it!).
- What services does Principal Trust Company offer for a Education Savings Account?
- Who may have an Education Savings Account?
- How much may be contributed to an Education Savings Account?
- Who may contribute to a Education Savings Account?
- How many Education Savings Accounts may a child have?
- When are withdrawals tax-free or taxed?
- What happens to the assets that remain in the account after the beneficiary completes his/her education?
- What are qualified education expenses?
- What is an eligible educational institution?
- When must contributions be made?
- When must assets be distributed?
What services does Principal Trust Company offer for a Education Savings Account?
Our services include:
- Trustee services
- IRS Forms 5498-ESA and 1099-Q
- Toll-free number for customer service
- Notification of age requirement
Who may have an Education Savings Account?
A Coverdell Education Savings Account is established for the benefit of a child under the age of 18.
How much may be contributed to an Education Savings Account?
While there is an annual limit on the amount that can be contributed for each beneficiary, there is no limit on the number of beneficiaries that an individual may contribute to. However, the contribution amount is dependent on the contributing individual's Adjusted Gross Income (AGI). Above certain AGI limits, an individual may not be eligible to make a contribution, so it may make sense for an ineligible person to give the funds to an eligible person to make the contribution.
- The contributions are nondeductible and must be made in cash.
- Contributions cannot be made after a designated beneficiary reaches his or her 18th birthday, unless the beneficiary is a designated special needs individual.
- Contributions may be made to both the ESA and state sponsored (529) college tuition programs.
Who may contribute to a Education Savings Account?
Anyone, even the beneficiary of the ESA, may contribute. However, the contribution amount is dependent on the contributing individual's Adjusted Gross Income (AGI). Above certain AGI limits, an individual may not be eligible to make a contribution, so it may make sense for an ineligible person to give the funds to an eligible person to make the contribution.
How many Education Savings Accounts may a child have?
There is no limit to the number of Education Savings Accounts one child may have. However, the total contributions to all accounts for that child cannot exceed the annual maximum. If an over-contribution is made, the excess (and any earnings) must be withdrawn from the account before May 31 of the year following the year in which the contributions were made.
When are withdrawals tax-free or taxed?
The beneficiary may take a tax-free withdrawal to pay for any qualified education expenses as long as the withdrawal does not exceed the expense and is taken during a year when there are education expenses. Otherwise, a portion of the distribution is taxable. That portion is made up of the earnings that have accumulated in the account, and may also be subject to an additional 10% tax. It is not taxable if amounts are withdrawn and rolled over to another Education Savings Account for the same person or certain members of that person's family.
What happens to the assets that remain in the account after the beneficiary completes his/her education?
Assets remaining in the account may be withdrawn or rolled to another Education Savings Account. The earnings on an unqualified withdrawal will be subject to both income tax and an additional 10% tax. If the amount is rolled to another Education Savings Account for the benefit of another family member, then it is not taxable. The designated beneficiary can be changed to a member of the beneficiary's family provided he/she are under age 30.
What are qualified education expenses?
Qualified education expenses include tuition, fees, books, supplies and equipment needed for enrollment or attendance, and room and board at qualified schools. This includes public, private, and religious schools. Qualified education expenses now include elementary and secondary school educational expenses.
What is an eligible educational institution?
An eligible educational institution is any college, university, or vocational school and includes almost all accredited public, nonprofit, and proprietary educational institutions.
When must contributions be made?
Contributions must be made by the due date of the beneficiary's tax return, not including extensions.
When must assets be distributed?
Assets must be distributed within 30 days of:
- The date the designated beneficiary reaches age 30, or
- The designated beneficiary's date of death.
Note: This information should not be construed as providing individual tax or legal advice. Please read carefully Notice 97-60 and consult your own tax advisor or attorney regarding your individual situation.
