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Coverdell ESA

A Lord Abbett Coverdell Education Savings Account (ESA) 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 income qualify, you can 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?

Coverdell Education Savings Account (ESA) was created to help save for a child’s education, covering grades K-12 and higher education. Contributions to an ESA are made with aftertax dollars, however, withdrawals used to pay for qualified education expenses are tax-free. Qualified expenses include: tuition, fees, books, etc.

How does a Coverdell ESA work?

An individual establishes and can contribute up to the $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, $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 that wants to invest in a broad range of investments


An ESA offers the following benefits:

  • Tax-advantaged withdrawals if the funds are used to pay for qualified education expenses
  • All withdrawals, including earnings, are tax-free provided the funds are used to pay for qualified education expenses.
 
saving rolling

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 must 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, the account must be exhausted before the age of 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 both federal income tax and 10% penalty tax.

Coverdell ESA eligibility requirements

Donor's tax filing status
If modified adjusted gross income (MAGI)2 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.


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 also 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.

OPEN A COVERDELL ESA

  1. Complete the writable Coverdell Application

  2. Print and send to Lord Abbett by mail, fax, email or use our Free FedEx shipping option

  3. You’ll receive a confirmation once your account 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 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 2018. The ESA beneficiary would have until June 1, 2019 to withdraw the excess $1,000. A 10% penalty applies to earnings if the excess in not withdrawn by June 1st.

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 (A 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 also must 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).

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