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Regarding Coverdell Education Savings Account (ESA) (https://www.irs.gov)

Q. Who can contribute to a Coverdell ESA?

A. Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return).

How is the MAGI rule enforced and what is the penalty contributing to a Coverdell and earning over $110k MAGI?

  • Doesn't the linked doc reference a 6% penalty? In my opinion, that's what applies. – JoeTaxpayer May 13 '17 at 0:50
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I wouldn't be surprised if it was similar to excess contributions. The fairmark.com article More on Contributions to Coverdell Accounts suggests, "Unless there is a timely corrective distribution, a 6% penalty tax applies to the excess contribution. What's more, the 6% penalty applies to the same excess every year until it's withdrawn from the Coverdell account (or treated as withdrawn as explained below)."

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The current answer tells you the penalty.

You also asked, how is it enforced? In my opinion, the excess deposit is easy, a broker sees the deposit and it's reported, just like IRA deposits or interest, etc. But the "over MAGI" is tougher to discover. The ESA can be funded by anyone. If I made over the MAGI limit, I can easily ask a close relative (grandma?) to make the deposit and find a way to get $2000 back to her. The 529 has no MAGI limit, and I suspect that the MAGA /ESA disqualification isn't high on the IRS radar.

  • It's possible to contribute less than $2K even though you earn more than $110K. – RonJohn May 13 '17 at 14:56
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    Well, no. The phaseout is from $95K - $110K for singles. Zero at $110K. – JoeTaxpayer May 13 '17 at 15:08
  • I see your point. – RonJohn May 13 '17 at 16:24

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