Coverdell ESA Eligibility

Any beneficiary (child who will benefit from the account) who is under age 18 can have a Coverdell ESA. Special Needs Students may have a Coverdell ESA regardless of their age.  It has been frequently called an Education IRA, as it has some similarity to a Traditional IRA or a Roth IRA, in that earnings are tax deferred and potentially income tax-free if used to pay qualified education expenses, such as tuition and room and board.

Coverdell ESA rules require contributions be made by a donor who meets specific income tests. The donor can be anyone and does not have to be related to the beneficiary.  A parent, grandparent, uncle, aunt, or even a friend can make the contribution.  The following table should be helpful:

Donor's tax filing status	If modified adjusted gross (AGI) 1 income is:	Then...
Joint filers	$190,000 or less	A full contribution is allowed.
	$190,001 to $220,000	A pro-rated contribution is allowed.
	More than $220,000	No contribution is permitted.
Single filers	$95,000 or less	A full contribution is allowed.
	$95,001 to $110,000	A pro-rated contribution is allowed.
	More than $110,000	No contribution is permitted.

In addition, corporations, and other entities, including tax-exempt organizations, may contribute to a Coverdell ESA, regardless of income. In other words, if the donor owned a business and the business made the contribution, the income test would not apply to the donor.

Once the contribution is made, the owner of the account becomes the account's custodian. The custodian must be the child's parent or legal guardian, so a relative or a friend, for example, making a contribution has no control after the deposit is made.

Since distributions, including earnings, used to pay qualified educational expenses are exempt from tax, the rules require the beneficiary to spend down the account before the age of 30 unless he/she is a Special Needs Student. Assets that are not going to be used for qualified education expenses can be transferred to another family member before the beneficiary attains age 30. Funds that are not used for qualified education expenses must otherwise be distributed to the beneficiary (or withdrawn by beneficiary), subjecting the earnings to tax and a 10% penalty.

Consider a Lord Abbett Coverdell ESA if you:

• Would like to save tax efficiently for a child's education;
• Would like the flexibility to invest the assets in mutual funds you select; or
• Are a grandparent or other family member who would like to contribute toward a child's education.

¹ Adjusted gross income includes wages, interest, capital gains, income from retirement accounts, and alimony paid to the taxpayer adjusted downward by specific deductions (including contributions to deductible retirement accounts and alimony paid by the taxpayer), but not including standard and itemized deductions.