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Coverdell ESA at a Glance Don't rely on this table alone. It provides only general highlights. See the text for definitions of terms and for more complete explanations. Table 6-1. Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Are distributions tax free? Yes, if the distributions aren't more than the beneficiary's adjusted qualified education expenses for the year. What Is a Coverdell ESA? A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of pay- ing the qualified education expenses of the Designated beneficiary (defined later) of the account. When the account is established, the designated bene- ficiary must be under age 18 or a special needs benefi- ciary. To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. The document creating and governing the account must be in writing and must satisfy the following require- ments. 1. The trustee or custodian must be a bank or an entity approved by the IRS. 2. The document must provide that the trustee or custo- dian can only accept a contribution that meets all of the following conditions. a. The contribution is in cash. b. The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. c. The contribution wouldn't result in total contribu- tions for the year (not including rollover contribu- tions) being more than $2,000. 3. Money in the account can't be invested in life insur- ance contracts. 4. Money in the account can't be combined with other property except in a common trust fund or common investment fund. 5. The balance in the account must generally be distrib- uted within 30 days after the earlier of the following events. a. The beneficiary reaches age 30, unless the bene- ficiary is a special needs beneficiary. b. The beneficiary's death. Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. The expenses can be either quali- fied higher education expenses or qualified elementary and secondary education expenses. Designated beneficiary. This is the individual named in the document creating the trust or custodial account to re- ceive the benefit of the funds in the account. Contributions to a qualified tuition program (QTP). A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. In the case of a change in benefi- ciary, this is a qualified expense only if the new benefi- ciary is a family member of that designated beneficiary. See chapter 7. Eligible Educational Institution An eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secon- dary school. Eligible postsecondary school. An eligible postsecon- dary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, uni- versity, vocational school, or other postsecondary educa- tional institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition. The edu- cational institution should be able to tell you if it is an eligi- ble educational institution. An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program ad- ministered by the U.S. Department of Education. Eligible elementary or secondary school. An eligible elementary or secondary school is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Page 40 Chapter 6 Coverdell Education Savings Account (ESA)