A Coverdell Education Savings Account (ESA) is a type of savings account in the United States that is specifically designed for educational expenses. They are also known as Education IRAs, named after the 1998 law that created them. It is a type of trust or custodial account that allows you to save for a child’s education on a tax-advantaged basis.
Is contribution to Coverdell ESA tax deductible?
One of the major benefits of a Coverdell ESA is that contributions to the account are not tax-deductible, but the money in the account grows tax-free, and withdrawals for qualified educational expenses are also tax-free. Qualified expenses include tuition, fees, books, supplies, and certain equipment required for enrollment or attendance at an eligible educational institution.
The contributions to a Coverdell ESA are limited to $2,000 per year per beneficiary, regardless of the number of contributors. This limit applies to all Coverdell ESA accounts for a single beneficiary. The account must be established before the beneficiary reaches age 18 and contributions must cease by the time the beneficiary reaches age 18. The account must be used by the time the beneficiary reaches age 30 or the funds will be distributed and taxes and penalties will apply.
What is the eligibility for Coverdell ESA?
To be eligible to contribute to a Coverdell ESA, you must have modified adjusted gross income (MAGI) below certain limits. For the tax year 2021, the phase-out range for single filers is between $95,000 and $110,000, and for married couples filing jointly, it’s between $190,000 and $220,000.
Coverdell ESA can be used in conjunction with other education savings plans such as the 529 plan. However, it’s important to note that if you use the money from a Coverdell ESA for non-qualified expenses, the earnings portion of the withdrawal will be subject to taxes and a 10% penalty.