Coverdell ESA Income Limits and Contribution Rules

A Coverdell Education Savings Account, or ESA, is a tax-advantaged account designed to help families save for education expenses. Funds from a Coverdell ESA can be withdrawn tax-free when used for qualified costs, which include college tuition as well as expenses for elementary and secondary school. This flexibility makes it a useful tool for long-term education planning. However, eligibility to contribute is directly tied to the contributor’s annual income, which determines both the ability to contribute and the maximum amount that can be saved each year.

Determining Your Eligibility Based on Income

Your ability to contribute to a Coverdell ESA depends on your Modified Adjusted Gross Income (MAGI). MAGI is calculated by taking your Adjusted Gross Income (AGI) from your tax return and adding back certain deductions, such as those for student loan interest, tuition and fees, and some foreign-earned income. This MAGI figure is the determinant for eligibility, not your gross salary or standard AGI.

The Internal Revenue Service sets MAGI thresholds that determine if you can contribute the full amount, a reduced amount, or nothing. For 2025, single filers and heads of household can make the maximum contribution if their MAGI is $95,000 or less. Married couples filing jointly can make the full contribution if their MAGI is $190,000 or less.

There is a phase-out range where the ability to contribute is gradually reduced. For single filers, this range is between a MAGI of $95,001 and $109,999; if your MAGI is $110,000 or more, you cannot contribute. For joint filers, the phase-out range is between $190,001 and $219,999; a MAGI of $220,000 or more disqualifies a contribution.

Calculating Your Maximum Contribution

If your MAGI falls within the phase-out range, your maximum contribution of $2,000 per beneficiary is reduced. The calculation involves multiplying $2,000 by a fraction. The numerator is your MAGI minus the lower limit of your phase-out range ($95,000 for single, $190,000 for joint). The denominator is the size of the phase-out range ($15,000 for single, $30,000 for joint).

To illustrate, consider a single filer with a MAGI of $100,000. Their MAGI is $5,000 over the $95,000 lower threshold. This $5,000 excess is divided by the $15,000 phase-out range, resulting in 0.333. This decimal is multiplied by the $2,000 maximum contribution, which equals a reduction of $666. Subtracting this reduction from $2,000 gives this individual a maximum allowable contribution of $1,334 for the year.

The total contributions for a single beneficiary cannot exceed $2,000 annually, regardless of how many people contribute to accounts for that child. Contributors must coordinate to ensure this total limit is not breached.

Contribution Strategies for High-Income Earners

Individuals whose income surpasses the MAGI limits are prohibited from contributing directly to a Coverdell ESA. However, this restriction does not prevent funds from being added to an account for a beneficiary. The income limitation applies to the person making the contribution, not the child who is the designated beneficiary, which opens up alternative funding strategies.

A common strategy is for an eligible person, such as a grandparent or other relative with an income below the MAGI threshold, to make the contribution. High-income parents can gift the funds to the eligible person for this purpose. The child beneficiary can also contribute if they have their own earned income.

Another method involves contributions from non-individual entities. Corporations and trusts can contribute to a Coverdell ESA without being subject to MAGI limitations. This allows a family-owned corporation, for example, to make a $2,000 contribution for a beneficiary even if the shareholders are ineligible based on their personal incomes.

Consequences of Exceeding Contribution Limits

Contributing more than your allowable limit results in a penalty. An excess contribution is the amount beyond your calculated maximum, whether it’s the full $2,000 or a reduced amount from the phase-out. Any contribution from an individual whose MAGI is over the limit is considered an excess contribution.

An excess contribution results in a 6% excise tax levied by the IRS on the beneficiary. This is not a one-time penalty; it applies to the excess amount for each year it remains in the account. The tax is reported and paid using IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.

To avoid the recurring excise tax, the excess contribution must be withdrawn by May 31 of the year following the contribution. The withdrawal must include the excess amount plus any earnings on that amount. These earnings are considered taxable income for the beneficiary.