33.10 Contributing to a Coverdell Education Savings Account (ESA)

A Coverdell Education Savings Account, or ESA, is a trust or custodial account set up specifically for the purpose of paying the qualified education expenses of the designated beneficiary of the account. A contribution cannot be made for a beneficiary after he or she reaches age 18 unless the beneficiary is a special needs beneficiary, as discussed below. Contributions must be in cash. Coverdell Education Savings Accounts were formerly known as Education IRAs.

Law Alert

Possible Cutback in ESA Benefits for 2013

Unless Congress extends to 2013 the Coverdell ESA rules in effect for 2012, much less favorable rules will apply in 2013. The contribution limit would fall to $500 per designated beneficiary, and married persons filing jointly would be subject to a less favorable phaseout range. Only withdrawals for higher education expenses would be considered qualified expenses for distribution purposes (33.11). See the e-Supplement at jklasser.com for an update on the rules for 2013.

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Contribution deadline.

The deadline for making a contribution for any year is the due date of your return for that year (not including extensions). You can make a contribution to a Coverdell ESA up until April 15, 2013, and designate it as a contribution for 2012.

Contribution limit for 2012.

The maximum cash contribution that any individual (including the designated beneficiary) can make for a designated beneficiary for 2012 is $2,000. The $2,000 limit is generally reduced if your 2011 modified adjusted gross income (MAGI) is between $95,000 and $110,000, or if you are married filing jointly, between $190,000 and $220,000. For most individuals, MAGI is the same as adjusted gross income (AGI), but if the foreign earned income exclusion or an exclusion of income from Puerto Rico or American Samoa is claimed, the exclusion is added back to AGI. You may not contribute to a beneficiary’s Coverdell ESA for 2012 if your MAGI is $110,000 or more, or $220,000 or more if filing a joint return.

If more than one Coverdell ESA has been set up for a beneficiary, the total 2012 contribution limit for all of the accounts is $2,000, regardless of how many persons contribute.

A 6% excise tax applies to Coverdell ESA contributions that exceed $2,000 for 2012 for any beneficiary. The penalty is imposed on the beneficiary (Form 5329). The excise tax does not apply if the excess contributions (and any earnings) are withdrawn before the first day of the sixth month (June 1) of the following year. The withdrawn earnings are taxable for the year in which you made the excess contribution.

Special needs beneficiary.

Contributions to a Coverdell ESA for a special needs beneficiary may be made even if he or she is over age 18.