682 / What are the rules governing contributions to a Coverdell Education Savings Account?

Annual contributions to a Coverdell Education Savings Account (“ESA”) must be made in cash on or before the date on which the beneficiary attains age eighteen unless the beneficiary is a special needs beneficiary. According to the Conference Report, a special needs beneficiary includes an individual with a physical, mental, or emotional condition (including learning disabilities) that requires additional time to complete his or her education.¹ Annual contributions may be made up until the due date (excluding extensions) for filing the tax return for the calendar year for which such contributions were intended.²

In general, the aggregate amount of contributions to an ESA on behalf of a beneficiary (except in the case of rollover contributions) cannot exceed $2,000.³ The maximum contribution amount is phased-out for certain high-income contributors. The maximum contribution for single filers is reduced by the amount that bears the same ratio to such maximum amount as the contributor’s modified adjusted gross income (MAGI) in excess of $95,000 bears to $15,000.⁴ For joint filers, the maximum contribution is reduced by the amount that bears the same ratio to such maximum amount as the contributor’s MAGI in excess of $190,000 bears to $30,000.⁵ For this purpose, MAGI is adjusted gross income without regard to the exclusions for income derived from certain foreign sources or sources within United States possessions.⁶ Contributions to an ESA are not limited due to contributions made to a qualified state tuition program in the same year.

Contributions in excess of the maximum annual contribution (as reduced for high-income contributors) that are not returned before the first day of the sixth month of the taxable year following the taxable year in which the contribution was made are subject to the 6 percent excess contribution excise tax under Code section 4973(a).⁷ Note that any excess contributions from previous taxable years, to the extent not returned, will continue to be taxed as excess contributions in subsequent taxable years.⁸

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1. IRC § 530(b)(1).