1. Education Savings Account: Introduction
  2. Education Savings Account: Qualifying To Contribute
  3. Education Savings Account: Opening An ESA
  4. Education Savings Account: Avoiding Taxes On Distributions
  5. Education Savings Account: Conclusion

By Reyna Gobel

Before you decide to open an ESA, you should figure out if you qualify to contribute based on your modified adjusted gross income (MAGI).

Why is it "qualify to contribute" rather than "qualify to open" an account? ESAs can be a community fund for a child's education. Aunts, uncles, parents, grandparents or friends of the family may all decide to contribute to little Billy's education at some point. Each person doesn't need to open a separate account, but each one does need to be within qualifying income limits. (Overwhelmed by increasing tuition costs for your kids? Check out Investing In Your Child's Education.)

As of tax year 2010, contributors must have a MAGI of under $110,000 for a single person or $220,000 for a married couple. However, toward the upper limit for single and married filers, the maximum allowable contribution amounts are reduced. The MAGI range subject to partial contributions is $95,000 to $110,000 for single individuals and $190,000 to $220,000 for married couples.

Example - Income and ESA Contributions
Johnny wants to help his brother Dave save for his daughter Jodi\'s future education. Being that Jodi\'s only three, Johnny has no idea whether Jodi will go to a private elementary or high school at some point, which can be as expensive as college. So Johnny decides he\'d like to contribute to an ESA for Jodi. The problem is Johnny makes $100,000 per year.
Johnny can calculate the amount he can contribute with the following equation:
Maximum MAGI ($110,000) - Johnny\'s MAGI ($100,000) = $10,000
$10,000/ ($110,000-maximum MAGI to qualify for full contribution ($95,000))= 2/3 or .67
2/3 x $2,000 = $1,333
Next year, Johnny marries Cindy who has a $100,000 MAGI. They have a baby later in the year. The power couple\'s total income is $210,000. Now they want to contribute to Jodi and baby Tommy\'s education.
Johnny and Cindy calculate their allowed contributions with married MAGI limits:
Maximum MAGI ($220,000) – Johnny and Cindy\'s MAGI ($210,000) = $10,000
$10,000/ (Maximum MAGI for a married couple ($220,000 - $190,000) = 1/3 or 0.33
1/3 x $2,000 = $667 per child. Johnny can contribute $667 and Cindy can put the first $667 in their son\'s account.
Check out the table below for more details for more contributions based on MAGI.


Contributions Allowed per Child (beneficiary)
Single
Married
MAGI
Contribution Allowed
MAGI
Contribution Allowed (per spouse)
$95,000
$2,000
$190,000
$2,000
$100,000
$1,333
$200,000
$1,333
$105,000
$667
$210,000
$667
$110,000
$0
$220,000
$0
Summing Up Qualifications
Contributing to a Coverdell Savings Account isn't just for the parents of the child. Anyone can contribute, as long they meet income limits. You can contribute $2,000 per child if your modified adjusted gross income (MAGI) is below $95,000 as a single person or $190,000 as a married couple. Individuals with MAGIs above $95,000 and below $110,000 can contribute a portion of $2,000, as well as married couples making above $190,000 and below $220,000. (Find out what to do when your kid is ready for higher education, but you aren't. Read Last-Minute Strategies To Help Pay For College.)


Education Savings Account: Opening An ESA
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