Form 5305-E: Coverdell Education Savings Trust Account
Form 5305-E is a model trust account agreement pre-approved by the Internal Revenue Service (IRS) for establishing a Coverdell Education Savings Trust Account (ESA). This account allows you to save money for a designated beneficiary's qualified education expenses with potential tax benefits.
What's the Purpose of a Coverdell Education Savings Trust Account?
A Coverdell Education Savings Trust Account allows you to save money for a designated beneficiary's qualified education expenses. These expenses can include:
- Tuition
- Fees
- Books and supplies
- Room and board (if enrolled at least half-time)
- Special needs services
Key Points To Remember About Form 5305-E:
Grantor vs. Trustee: In a Coverdell ESA trust, the person establishing the account is called the "grantor" (similar to a donor in a trust) and the financial institution managing the account is the "trustee."
Contributions: The maximum annual contribution limit for a Coverdell ESA is $2,000 per beneficiary. Contributions are not tax-deductible, but earnings within the account grow tax-free if used for qualified education expenses.
Designated Beneficiary: The beneficiary must be named in the trust agreement and cannot be older than 18 when contributions are made. There is no income limit for the beneficiary.
Distribution: Distributions from a Coverdell ESA used for qualified education expenses are generally tax-free. However, distributions not used for qualified expenses may be subject to income tax and a 10% penalty.
Form 5305-E vs. Form 5305-EA
There are two versions of the model agreement: Form 5305-E for trust accounts and Form 5305-EA for custodial accounts. Custodial accounts offer simpler administration but may have limitations compared to trusts (consult with a financial advisor for details).
What are qualified education expenses?
Qualified education expenses encompass a variety of costs associated with attending an eligible educational institution. These include tuition, fees, books and supplies, room and board (if enrolled at least half-time), and even special needs services.
What happens if the funds are not used for qualified education expenses?
If withdrawals are not used for qualified education expenses, they will be subject to income tax and a 10% penalty on the earnings portion of the withdrawal.
Can I contribute to multiple Coverdell ESAs for the same beneficiary?
Yes, you can contribute to multiple Coverdell ESAs for the same beneficiary, but the total annual contributions cannot exceed the $2,000 limit.
What happens to the funds when the beneficiary reaches a certain age?
Generally, contributions must stop once the beneficiary reaches 18 years old. However, any existing funds in the account can remain and continue to grow tax-free until they are withdrawn. If the funds are not used for qualified education expenses by the time the beneficiary reaches age 30, they will be subject to income tax and the 10% penalty on earnings.