Coverdell ESA Beneficiaries
The IRS Form 5498-ESA is what's known as an information return. Other examples of information returns include the Form 5498 for IRA contributions and the 1099-MISC for money paid to an independent contractor. One function of an information return is for a bank or business to report the movement of money to the IRS. In the case of the 1099-MISC, it helps the IRS track the income of self-employed workers. Form 5498-ESA helps the IRS make sure that no more than $2,000 is deposited in a beneficiary's name in the same tax year.
The second function of an information return is to tell the beneficiary — also known as the payee — that a payment has been reported to the IRS. That's why there are two copies of each Form 5498-ESA: "Copy A" for the IRS and "Copy B" for the beneficiary. The trustee of the Coverdell ESA — a bank or other financial institution issuing the account — is responsible for completing and mailing out both copies of the Form 5498-ESA.
Who is the beneficiary of a Coverdell ESA? It's the student, not the person, who is contributing money to the student's account. For the student to qualify as a beneficiary, a Coverdell ESA must be established before the student reaches 18 years old (or older if the student has special needs). The account must be designated as a Coverdell from the start, not rolled over from another kind of savings account [source: IRS].
There are several boxes on the IRS Form 5498-ESA reserved for information about the beneficiary, known here as the "recipient":
- Recipient's name
- Full mailing address
- Social Security number
- Account number
The account number of the Coverdell ESA helps the IRS keep track of multiple Coverdell accounts that name the same person as a recipient. Remember, there is no limit to the number of accounts tied to the same beneficiary, only that the total value of all annual contributions to that beneficiary not exceed $2,000 [source: IRS].
Next, we'll talk about the IRS definitions of contributions and rollovers.