Form 5305-EA: Coverdell Education Savings Custodial Account
Form 5305-EA is a standardized agreement pre-approved by the Internal Revenue Service (IRS) that establishes a Coverdell Education Savings Account (ESA). This account allows individuals to save money for a designated beneficiary's qualified education expenses with potential tax benefits.
What's the Purpose of Form 5305-EA?
By completing and executing Form 5305-EA, you (the depositor) and the custodian (the financial institution holding the account) formally agree to the terms governing the Coverdell ESA. This ensures both parties understand their roles and responsibilities in managing the account for the designated beneficiary's educational pursuits.
Key Roles in a Coverdell ESA
- Depositor: The person who establishes the account and makes contributions.
- Custodian: The financial institution that holds the account and invests the funds according to your chosen investment options.
- Designated Beneficiary: The individual for whom the account is established and whose qualified education expenses the funds are intended to cover.
- Responsible Individual (Optional): A parent or guardian appointed by the depositor to manage the account on behalf of a minor designated beneficiary.
Key Points to Remember About Form 5305-EA
Contributions
- Maximum annual contribution of $2,000 per beneficiary (as of 2024).
- Contributions must be made in cash.
- Phase-out of contribution limits for higher income earners.
Qualified Education Expenses
- Funds can be used for tuition, fees, books, supplies, and certain room and board expenses at qualified educational institutions.
- Covers elementary, secondary, and higher education.
Account Distribution
- Funds must be used for qualified education expenses by the time the beneficiary reaches age 30.
- Distributions not used for qualified expenses may be subject to taxes and penalties.
Who can be a custodian for a Coverdell ESA?
Any institution qualified to hold IRAs can serve as a custodian for a Coverdell ESA. This includes banks, trust companies, and certain investment firms.
Who can be a designated beneficiary for a Coverdell ESA?
The designated beneficiary must be a U.S. citizen or resident alien under the age of 18. They can be the depositor's child, grandchild, niece, nephew, or certain other family members.
What are the tax benefits of a Coverdell ESA?
Contributions to a Coverdell ESA may be tax-deductible for some individuals depending on their income level. Earnings within the account grow tax-free and qualified distributions for education expenses are not taxed.
What happens if the funds in the Coverdell ESA are not used for qualified education expenses?
If distributions are not used for qualified education expenses, they may 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, contributions can be made to multiple Coverdell ESAs for the same beneficiary, but the total annual contribution limit of $2,000 per beneficiary still applies.