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March 5, 2009

Education Savings Account (ESA)

Your Guide



These accounts are no longer called Education IRAs. Under S. 1190, the name was changed to  Coverdell Education Savings Account (CESA) also called Education Savings Account (ESA).

CESA is a tax-deferred savings account,  created or exclusively for the purpose of paying the qualified education expenses of an individual who is the designated beneficiary of the ESA.

An ESA must be must be  designated as an ESA at the time it is established.

The following are some of the rules that apply to an ESA:

  • Contributions must be made in cash, except for a rollover of distributed securities from another ESA
  • Contributions cannot be made to the account after the date the beneficiary reaches age 18. This age limitation does not apply to a beneficiary with special needs
  • Except for rollover contributions, contributions are limited to $2,000
  • Any balance in the ESA as of the date on which the beneficiary attains age 30  must be distributed within 30 days after such date to the beneficiary. This age limitation does not apply to a beneficiary with special needs
  • If the beneficiary dies before attaining age 30, the balance must  be distributed within 30 days after the date of death of the beneficiary. Exceptions to this deadline are made for beneficiaries with special needs
  • An ESA must be established with a bank, credit union or other institution approved by the IRS
  • Amounts used for qualified education expenses are tax and penalty-free
  • ESA earnings are subject to taxes  unless the amount is used for the  beneficiary’s qualified education expense
  • ESA earnings are subject to the early distribution penalties unless the amount is used for  the beneficiary’s qualified education expense, or an exception applies
  • Rollovers and transfers can be made between ESAs of the same beneficiary, or eligible family members
  • Rollovers can be made from ESAs to 529 plans
Referring Cite
IRC §530 ,  EGTRRA §401(a) , IRS Publication 970
Additional Helpful Information
  • If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return.
  • There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. See Contributions, later.
  • Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary’s family (including the beneficiary’s spouse) who is under age 30. This age limitation does not apply if the new beneficiary is a special needs beneficiary.
  • Your contribution limit may be reduced. If your modified adjusted gross income (MAGI) (defined below) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit, later). If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone’s Coverdell ESA.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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