Coverdell ESA | Education Savings Account | Lord Abbett

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Coverdell ESA

A Lord Abbett Coverdell Education Savings Account offers investors the ability to save for a child’s education. As long as the student for whom you are saving is under age 18 and you are income qualified, you're eligible to establish a Coverdell ESA.

Overview

Overview

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

What is a Coverdell ESA?

A Coverdell Education Savings Account (ESA)  is a tax-advantaged account to help families save for a child’s education—K-12 and higher education. Contributions to an ESA are made with aftertax dollars; however, funds used to pay for qualified education expenses are distributed tax-free. Qualified expenses, for example, include tuition, fees, books, etc.

How does a Coverdell ESA work?

An individual can contribute up to $2,000 per year, per child. The individual or entity making the contribution (donor) can be anyone, including the student. However, the donor must satisfy certain income requirements. Joint filers, whose household income is $190,000 or less and single filers, with $95,000 or less can make the maximum $2,000 annual contribution.

Who should consider a Coverdell ESA?

  • An individual looking to save on a tax-advantaged basis for a child’s education
  • An individual looking for withdrawal flexibility—qualified education expenses include elementary and higher education
  • An individual seeking to invest in a broad range of investments


A Coverdell ESA offers the following benefits:

  • All withdrawals, including earnings, are distributed tax-free provided the funds are used to pay for qualified education expenses.
 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

Eligibility

Eligibility

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

Who is eligible to establish a Coverdell ESA?

Unless the beneficiary is a special needs student1, contributions cannot be made into an ESA after the beneficiary reaches age 18.

ESA contribution rules require that donors satisfy an income test. An eligible donor can be anyone related or unrelated to the beneficiary. Once a contribution is made, the ESA custodian is required to be the child’s parent or legal guardian.

Distributions, including earnings, used to pay for qualified education expenses are exempt from federal income tax. Additionally, an ESA must be exhausted before age 30, unless the beneficiary is a special needs student.

Funds that are not used for qualified education expenses must otherwise be distributed to the beneficiary, subjecting the earnings to federal income tax and a 10% penalty tax.

Eligibility Requirements

Donor's tax filing status
If modified adjusted gross income (MAGI)2 is:
Then...
Joint filers
 $190,000 or less Full contribution.
$190,001 to $220,000 Pro-rated contribution.
More than $220,000 Contribution is not permitted.
Single filers
 $95,000 or less Full contribution.
$95,001 to $110,000 Pro-rated contribution.
More than $110,000 Contribution is not permitted.

1 A special needs student is one who, because of a physical, mental, or emotional condition (including a demonstrable learning disability) requires additional time to complete his or her education. Any requirements for a Special Needs Student specified in IRS regulations or rulings (if any) defining this term must be satisfied.
 2 Modified adjusted gross income (MAGI) includes wages, interest, capital gains, income from retirement accounts and alimony paid received by 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.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

HOW TO OPEN A COVERDELL ESA

  1. Complete the writable IRA Application

  2. Send completed application to Lord Abbett Funds Services Center

  3. Feel free to use our Free FedEx shipping option

  4. You’ll receive a confirmation once your IRA is established

Contributions

Contributions

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

What are the Coverdell ESA Contribution limits?

Each beneficiary, regardless of the number of donors, can receive ESA contributions totaling $2,000 annually. Contributions must be made prior to the beneficiary attaining age 18.

Who can make a Coverdell ESA contribution?

Any donor that satisfies certain income requirements is eligible to make contributions to an ESA.

What happens if a Coverdell ESA contribution exceeds the annual contribution limit?

The maximum annual ESA contribution is $2,000. An excess contribution must be removed by June 1st following the year in which the contribution was made. A 10% penalty tax applies to earnings if the excess is not removed by the June 1st deadline. Excess contributions are also subject to a 6% excess tax if not withdrawn timely.

Example:  A donor mistakenly makes an ESA contribution of $3,000 in December 2019. The ESA beneficiary would have until June 1st, 2022 to withdraw the excess $1,000. A 10% penalty tax applies to earnings if the excess in not withdrawn by June 1st.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

Distributions

Distributions

This material is intended as general information only and is not intended as legal or tax advice. Some of this information may be quite complex and we strongly suggest you consult with your advisor or tax professional based on your individual situation.

When can a Coverdell ESA distribution be made?

The designated beneficiary of an ESA must take distributions for qualified education expenses before age 30, unless the beneficiary is a special needs student1.

Can unused ESA funds be transferred to another family member?

Yes. Unused funds can be transferred to another family member2 of the beneficiary who is not 30 years old or is a special needs student; regardless of age.

What types of distributions are qualified education expenses?

Qualified ESA distributions include the following:

  • Tuition, fees, and tutoring
  • Special needs services for a special needs student (Special needs student is a student, who, because of a physical, mental, or emotional condition requires additional time to complete their education.)
  • Books, supplies, and equipment
  • Room and board, uniforms, transportation, and other required supplementary items

 

1 A special needs student is one who, because of a physical, mental, or emotional condition (including a demonstrable learning disability) requires additional time to complete his or her education. Any requirements for a Special Needs Student specified in IRS regulations or rulings (if any) defining this term must also be satisfied.
2 A "family member," for purposes of a Coverdell ESA, includes the beneficiary and any of the following who are under age 30, or who are Special Needs Students, regardless of age: the beneficiary's spouse, the beneficiary's children and their descendants, the beneficiary's stepchildren, the beneficiary's siblings and their children, the beneficiary's step-siblings, parents and grandparents, the beneficiary's nieces, nephews, aunts and uncles, the beneficiary's stepparents, sons and daughters-in-law, parents-in-law and brothers or sisters-in-law, and spouses of all the foregoing, and first cousins (but not the spouse of a first cousin).

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

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