Education Savings Account (ESA) Help
Every parent looks at their child and wonders what the future holds.
- What jobs will be available?
- What kind of training will my child need—college or technical school?
- Will there be enough money for my child's education?
You may not know the answer to the first two questions, but a Coverdell education savings account (ESA), can help you with the last answer.
Eligible taxpayers may deposit up to $2,000 per year into an ESA for a child under the age of 18. Parents, grandparents, other family members, friends, and even the designated beneficiary (child) may contribute to an ESA for the same child, but the total contributions for a child for a taxable year cannot exceed $2,000. Eligible taxpayers may contribute up to $2,000 for multiple children in a year.
Almost anyone can contribute to an ESA.
- Individuals of any age
- Individuals without earned income
- Individuals with modified adjusted gross income (MAGI) within the applicable limits for their tax filing status
There are two key limitations.
- Each child can receive up to the maximum contribution amount allowed per year ($2,000 per year) from all sources. It does not matter if this is done in a single account or in multiple accounts designed to benefit the same child.
- Contributors may be limited in how much they contribute if their MAGI exceeds $95,000 (for single filers) or $190,000 (for married tax filers). Above these income levels, the ability to contribute is phased out. An individual may not make an ESA contribution if her MAGI exceeds $110,000 for single tax filers or $220,000 for married tax filers.
A qualified education expense is one that is required for the enrollment or attendance by your child at an eligible educational institution.
These expenses include the following.
- Academic tutoring
- Special needs services
- Room and board expenses
Qualified family members include a designated beneficiary's
- child or descendent of child, stepchild, or eligible foster child;
- brother, sister, stepbrother, or stepsister;
- aunt or uncle;
- niece or nephew;
- parent, stepparent, or in-law (son, daughter, brother, sister, father, mother);
- spouse of any of the individuals named above; or
- first cousin.
Even with this extended range of family members, contributions only can be made for those under the age of 18.
If a designated beneficiary distributed more from her ESA than the cost of her qualified education expenses for the year, a portion of the distribution will be taxable to her. She must include the earnings attributable to the excess distribution in her gross income for the year, and pay a 10 percent penalty tax on the earnings amount, unless an exception applies (e.g., death or disability).
If the designated beneficiary does not use the ESA assets, or transfer or roll over the ESA assets to a qualified family member by age 30, the ESA is deemed distributed and is subject to taxation if not used for qualified educational expenses.