1. Coverdell Education Savings Account: Introduction
  2. Coverdell Education Savings Account: Who’s Eligible to Contribute?
  3. Coverdell Education Savings Account: Opening an ESA
  4. Coverdell Education Savings Account: Avoiding Taxes on Distributions
  5. Coverdell Education Savings Account vs. 529 Plan
  6. Coverdell Education Savings Account: Conclusion

The Internal Revenue Service (IRS) limits who may contribute to a Coverdell ESA. Your eligibility is based on your modified adjusted gross income (MAGI) and tax filing status.

As of 2017, single filers can contribute to a Coverdell account if their MAGI for the year is less than $110,000. For married couples filing a joint return, the MAGI threshold doubles to $220,000. Any individual can make these contributions, including parents, grandparents, other relatives or even ESA beneficiaries, although this may be less common. A trust or corporation can also make contributions to a Coverdell account on behalf of an eligible student. The income limits don’t apply to organizations making ESA contributions.  

Rules for Contributions

As far as the contributions themselves are concerned, there are three requirements the IRS expects you to meet: 

  1. Contributions must be in cash. In other words, you can’t use stocks or other investments to fund the account.
  2. Contributions can’t be made after the beneficiary turns 18, unless they have special needs.
  3. Contributions must be made by the due date of the contributing individual’s tax return. For most people, that would be the annual April filing deadline, even if you filed an extension on your taxes.

Contribution Phaseout Limits

Something else to note regarding contributions are the restrictions for individuals at the higher end of the MAGI scale. If you’re a single filer with an MAGI between $95,000 and $110,000, or a married couple whose MAGI falls between $190,000 and $220,000, the $2,000 limit is gradually reduced.

For example, a single person whose MAGI is $96,500 would be limited to contributing $1,800 to a Coverdell ESA for the year, based on the IRS formula for calculating contributions. A married couple filing jointly with an MAGI of $205,000 would be able to contribute $1,000 for the year. The worksheet for calculating contribution limits can be found in Publication 970, Tax Benefits for Education.

Avoid the Excess Contribution Penalty

Exceeding your annual contribution limit can result in a tax ding. The IRS requires ESA beneficiaries to pay a 6% excise tax each year on excess contributions that are still in their account at the end of the year.

The only exception to the penalty is for excess contributions that are distributed before the first day of the sixth month of the following tax year. But, any earnings included in the distribution would still be subject to regular income tax. The bottom line? It’s paramount that you figure your MAGI correctly before funding a Coverdell ESA to make sure you’re not contributing more than what’s allowed.

 


Coverdell Education Savings Account: Opening an ESA
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