Coverdell Education Savings Accounts

Sunset Provisions - Made Permanent

A "sunset" is an expiration date on a tax law, usually included for federal budgeting purposes. The following Coverdell provisions were set to expire at the end of 2012, but were made permanent by the American Taxpayer Relief Act of 2012:

  • The annual contribution limit per beneficiary is $2,000.
  • Qualified withdrawals include K-12 expenses in addition to post-secondary education expenses.
  • Distributions will be tax-free only for those taxpayers who do not claim an American Opportunity or Lifetime Learning Credit (if eligible) for the same expenses in the same year.

Description
The Coverdell Education Savings Account (formerly known as the Education IRA) was created in 1998 exclusively for the purpose of paying for "qualified education expenses" for an "eligible" student. Annual contributions are nondeductible, limited to $2,000 per beneficiary and can only be made until the account holder or designated beneficiary reaches age 18. The ability to contribute to a Coverdell ESA is phased out for single filers with Modified Adjusted Gross Income (MAGI) between $95,000 and $110,000 and for joint filers with MAGI between $190,000 and $220,000. These limits are based on the income of the contributor. The annual contribution deadline is April 15 of the following year.

Objective
To provide an account that individuals can use to save for qualified education expenses for eligible students.

A Coverdell ESA may be appropriate for any individual within certain income limits who wants to set aside funds for education expenses.

Account Features

  • Eligibility - Any individual under age 30 may be the beneficiary of a Coverdell ESA.
  • Contributions - Anyone whose income is within the phase-out ranges (mentioned above) can contribute to a Coverdell ESA. Contributions cannot exceed $2,000 per beneficiary per year. Dollars can be invested in a variety of products, depending upon the investment objectives of the account owner.
  • Distributions - The earnings portion of distributions that are used for non-qualified education expenses are subject to ordinary income tax, plus a 10% penalty. No penalty exists for withdrawals due to death, disability or scholarship. Any balance remaining in the Coverdell ESA must be distributed or transferred to another eligible family member when the beneficiary reaches age 30 or dies.
  • Tax Considerations - Contributions are not taxed as they accumulate, and distributions used to pay for qualified education expenses are not subject to federal income tax.
  • Financial Aid Considerations - Coverdell ESAs may impact financial aid eligibility. They are considered assets of the account owner; if owned by the student or parent, Coverdell ESAs are considered parental assets, and this generally has less impact on financial aid. Visit our Financial Aid Basics page to learn more.

For more information about Coverdell ESAs and saving for education or to open an account, set up a face to face meeting with the Edward Jones financial advisor in your community.

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