A Coverdell Education Savings Account (ESA) is a type of savings account set up to pay the education expenses of a beneficiary. This type of savings account qualifies for certain tax benefits. Contributions to a Coverdell ESA are not deductible, but earnings can grow tax-free in the account, and distributions are not taxable, to the extent they are used to pay qualified education expenses of the designated beneficiary. Qualified education expenses, for purposes of the Coverdell ESA, include not only postsecondary education, but also elementary and secondary school.
Who Can Open a Coverdell ESA?
Anyone can open a Coverdell ESA for a designated beneficiary under the age of 18 when the account is opened. The account can be opened in the United States at any bank or entity approved by the Internal Revenue Service (IRS) to offer Education Savings Accounts. Any person can contribute to the ESA, provided their modified adjusted gross income is less than $110,000 ($220,000 if married filing jointly). More than one Coverdell ESA can be established for the same beneficiary, but the total combined contributions to all ESAs for that beneficiary cannot be more than $2,000 in any given year.
Requirements for Opening a Coverdell ESA
When the account is set up, it must be designated as a Coverdell Education Savings Account, and it must satisfy the following requirements:
The trustee or custodian of the account must be a bank or an entity approved by the IRS for opening Coverdell ESAs.
The document that creates and governs the account must be in writing, and must specify that:
contributions can only be accepted in cash,
contributions must be made before the beneficiary reaches age 18,
total contributions for the designated beneficiary cannot be more than $2,000 in any one year,
money in the account cannot be invested in life insurance contracts,
money in the account cannot be combined with other property, except in a common trust or investment fund,
the balance in the account must be distributed within 30 days after the earlier of: