"The Pension Specialists" Blog

ATRA Makes Permanent the Coverdell ESA Law Changes Made in 2001

Unlike with the QCD which has had another 2 year short term extension, the Coverdell ESA changes of 2001 have been adopted on a permanent basis. The main changes are: the maximum contribution limits remains at $2,000 and is not reduced to $500, qualifying education expenses are all school related education expenses and not just post-secondary expenses and the special rules applying to an individual who has special needs.

The IRS should be revising its model Coverdell ESA forms (Form 5305-E and 5305-EA) to incorporate the special laws applying to individuals with special needs and the law authorizing military death gratuities be rolled over into a Coverdell ESA. Certain family members of soldiers who receive military death death benefits may make a rollover contribution, subject to certain limits, up to 100% of such benefits into a Coverdell ESA.

CESAs For Special Needs Individuals

2013 Tax/Financial Planning Rule. There should be a Coverdell ESA established for every special needs individual. How many CESAs does your institution service for special needs individuals?

ARTA was enacted into law on January 2, 2013. The CESA law changes in effect from 2002-2011 were made permanent.

The special rules for individuals with special needs are now permanent. A $2,000 annual contribution may be made for an individual with special needs regardless of his or her age. That is, even if he person with special needs is age 39, an annual $2,000 contribution may be made to his or her CESA. As long as the earnings of the CESA are used for the special needs individual's educational needs, such income will not be taxable.

One would expect that many parents, grandparents, sisters, and brothers will choose to establish a Coverdell ESA for an individual with special needs. This assumes they understand the availability of the Coverdell ESA. For whatever reason, the IRS has not yet revised its model CESA forms to authorize and emphasize the special rules for individuals with special needs. Even though the IRS is busy implementing other taxes, the IRS hopefully will make this revision. We at CWF will be revising Coverdell ESA forms to discuss the special rules applying to individuals with special needs.

In many cases the fact that the only tax benefit is relatively nominal (no taxation of the earnings); in some cases, this no taxation of earnings will be a substantial tax benefit. Considering how easy it is to establish a Coverdell ESA, more people should be doing so.