Coverdell Education Savings Accounts

Selecting a Coverdell Education Savings Account

Description
The Coverdell education savings account (formerly known as the Education IRA) was created in 1998 exclusively for the purpose of paying for “qualified higher education expenses” for an “eligible” student. Annual contributions are nondeductible and limited to $2,000 and can only be made until the account holder or designated beneficiary reaches age 18. The ability to contribute to a Coverdell education savings account is phased-out for single filers with Adjusted Gross Income (AGI) between $95,000 and $110,000 and for joint filers with AGI between $190,000 and $200,000. These limits are based on the income of the contributor. The contribution deadline is April 15 of the following year.
Objective
To provide an account that individuals can use to save for qualified education expenses for eligible students.
Suitability
Coverdell ESAs are specifically designed to help fund a child’s elementary, secondary and post-secondary education.  They can help to pay for qualified education expenses such as tuition, fees, books, and certain room and board costs at eligible educational institutions.
Product Features
  • Tax Advantages – Contributions are not taxed as they accumulate and distributions used to pay for qualified education expenses for eligible students are generally not subject to federal income tax.
  • Flexibility – Dollars can be invested in a variety of products depending upon the investment objectives of the account owner.
  • Termination Rule – Any balance remaining in the Coverdell education savings account must be distributed or transferred to another family member when the beneficiary attains age 30 or dies.
  • Penalty for Withdrawal – Distributions that exceed qualified education expenses would be subject to a 10% penalty unless due to death, disability or scholarship.
Sunset Provision – Extension through Dec. 31, 2012 – A sunset is an expiration date on a tax law, usually included for federal budgeting purposes. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010  extended several provisions within the Coverdell ESA through Dec. 31, 2012.  After Dec. 31, 2012, the following changes will occur to Coverdell ESAs, unless extended by Congress:
  • Only postsecondary education expenses can be qualified; K-12 expenses will no longer be eligible.
  • The annual contribution limit will be reduced from $2,000 per beneficiary to $500.
  • Distributions will be tax-free only for those taxpayers who do not claim a Hope or Lifetime Learning Credit (if eligible) in the same year.
If you are currently investing in a Coverdell ESA, you should contact us to discuss options for your situation.