Key Coverdell ESA Contribution Questions Administrators Face
Coverdell education savings accounts (ESAs) provide a unique savings vehicle with the potential to have tax-free income to cover the costs for education. Financial organizations generally manage their ESA programs similar to their IRA programs, but the rules surrounding ESAs differ.
Tax laws limit ESA contributions to $2,000 per year per child (i.e., the “designated beneficiary” of the ESA). ESA assets that are used for qualified education expenses are free from federal income taxes. ESA assets can be used for elementary and secondary education expenses, as well as postsecondary expenses.
Questions about ESAs surface when family members, or others, come into their financial organization to make contributions for their loved ones. Here are a few common questions about ESA contributions.
Who can contribute to an ESA?
Any person with income below certain levels can contribute to an ESA for a child. ESA contributions can also be made by entities (e.g., businesses, trusts, community organizations, etc.). The income limitations do not apply to entities.
If the contributor has modified adjusted gross income (MAGI) below $190,000 and is filing a joint income tax return, or below $95,000 if filing single, he can contribute the maximum annual limit ($2,000 per child) to an ESA. If the contributor’s MAGI falls between $190,000-$220,000 for joint filers, or $95,000-$110,000 for single filers, the contribution amount is gradually reduced, pro rata. If above those maximum amounts, the individual cannot contribute to ESAs. IRS Publication 970, Tax Benefits for Education, contains a worksheet to help contributors determine their eligible amount.
What is the Coverdell ESA contribution limit for 2018?
The ESA contribution limit is $2,000 per child, per year. Unlike IRA and health saving account (HSA) contributions, ESA contributions are not subject to annual IRS cost-of-living adjustments. It would require a law change for the ESA contribution limit to be adjusted.
Can the contributor take a federal income tax deduction for ESA contributions?
ESA contributions are not deductible at the federal level on the contributor’s income tax return; ESA contributions are treated as basis (after-tax assets) in the ESA. But when distributed from the ESA, the contribution amount is not be taxed again. And if used for qualifying education purposes, the earnings also is not subject to federal income taxes. Taxation may vary at the state level.
If multiple persons are contributing to a child’s ESA, can each person contribute the maximum $2,000?
No. The $2,000 contribution limit is per child, not per contributor. But a person (or entity) may contribute her eligible amount for any number of children. For example, if a contributor is eligible to make an ESA contribution of the maximum $2,000 after considering her MAGI, she may contribute that amount for each child—if she has five eligible grandchildren, she could contribute $2,000 to ESAs for each grandchild.
Can ESA contributions be made for a child who is attending college?
The law requires ESA contributions to cease upon the child’s 18th birthday, so contributions can be made for students who are attending higher education only if they are under age 18. However, this age limit doesn’t apply if the child (i.e., the designated beneficiary for the account) qualifies with special needs. See IRS Publication 970 for more detail.
Coverdell ESAs must be established with a written plan agreement that designates the account as an ESA. Ascensus® provides ESA documents—Coverdell ESA Simplifiers®—and various transactions forms, including contribution forms, to help financial organizations efficiently manage their ESA programs. More ESA questions and answers can be found in Ascensus’ Desktop Guide to Coverdell Education Savings Accounts. Call Ascensus at 800-346-3860, option 2, suboption 1, for more information.
