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
Related Articles
  1. Financial Advisor

    Why Coverdell ESAs May Trump 529 Plans

    Coverdell ESAs still trail 529 plans in popularity by a wide margin due to their low contribution limits. But these accounts can be a viable alternative.
  2. Retirement

    Don't Forget The Kids: Save For Their Education And Retirement

    Retirement and education financing are the two most important planning items for taxpayers.
  3. Retirement

    Analyzing IRA And ESA Statements

    Learn how to read and verify 5498 and 5498-ESA reporting your retirement-account contributions.
  4. Retirement

    An Introduction To Correcting Ineligible IRA Contributions

    Eager to save for retirement? Find out how to avoid overpayment penalties.
  5. Personal Finance

    Types of College Savings Plans and How They Work

    There are several types of college savings plans available. Here's how each works.
  6. Personal Finance

    529 Plan Contribution Limits in 2016

    Learn about the contribution and account balance limits on 529 plan accounts and discover how these contribution limits differ in each state.
Frequently Asked Questions
  1. Is it a good idea to take out a loan to invest?

    It is inadvisable for an investor to invest using a loan through a risky investment avenue like the stock or derivatives ...
  2. How can I find out which stocks pay dividends?

    To learn which stocks pay dividends, these resources help investors identify the companies that pay out earnings to shareholders ...
  3. How is interest charged on most lines of credit?

    Learn how most financial institutions calculate interest on lines of credit by using the average daily balance method and ...
  4. Can you borrow from a Vanguard 401(k)?

    Learn how Vanguard allows its 401(k) participants to take loans against their account with specific borrowing provisions ...
Trading Center