College Savings – Education Savings Account (ESA)

The beneficiary must be under the age of 18 and those contributing to the account must have an annual modified adjusted gross income of less than $110,000 or, for joint filers, less than $220,000.

You are allowed to contribute to the account annually up to $2,000 for any child under the age of 18. Contributions over the legal maximum are subject to a 6% additional tax for each year that the excess funds remain in the account. Additionally, all funds must be distributed within 30 days of the beneficiary’s 30th birthday. As of 2017, single filers may contribute to a Coverdell account if their modified adjusted gross income for the year is less than $110,000. For married couples filing a joint return, the modified adjusted gross income for the year is amended to $220,000 or less.

The age restrictions on both contributions as well as withdrawal deadlines are waived for a beneficiary with special needs. This allows you to contribute to the account past the beneficiary’s age of 18 and permits funds to remain in the account past their 30th birthday.

Unlike your average investment account, when the funds from an ESA are deducted in order to pay for qualified education expenses, no taxes are owed on the earnings from the account’s investments.

Withdrawals from a Coverdell ESA for qualified education expenses can be made up until the beneficiary turns 30, which provides a fair amount of time for a change of mind. It is also worth mentioning that the funds from the account can be applied to not only college qualified education expenses but from kindergarten to high school as well. If the beneficiary is not planning on using the ESA for education expenses, it can be transferred to another member of the beneficiary’s family without incurring any negative tax consequences. However, please note that the new beneficiary must be under the age of 30 in order to receive the Coverdell ESA. Overall, if you decide to withdraw the funds in its entirety for nonqualified expenses, the recipient will be subject to a 10% federal income tax penalty.

Each of our advisors at Florida Financial are knowledgeable on the Coverdell ESA and can help guide you to make sure it is the right choice for you. Contact us today for a free consultation.