Coverdell Education Savings Accounts
- What is a Coverdell Education Savings Account?
- What is the contribution limit?
- What is a qualified education expense?
- Who can contribute to a Coverdell Education Savings Account?
- Can I roll over funds from another Education Savings Account?
- Am I allowed to change the beneficiary?
- Who is a member of the family?
- How does the age waiver for a special needs beneficiary work?
- What is the contribution deadline?
- For more information...
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Every parent looks at their child and wonders what the future holds.
- What jobs will be available?
- What kind of training will my child need - college or technical school?
- Will the money be there for their education?
You may not know the answer to the first two questions, but an Education IRA, now known as a Coverdell Education Savings Account, can help you with the last answer.
What is a Coverdell Education Savings Account?
For the past several years, a Coverdell Education Savings Account (formerly the Education IRA) has provided an investment tool for the purpose of paying for the future cost of a child's post-secondary education. Through the 2001 tax year, maximum after-tax contributions of $500 were allowed per year for each child until they reach the age of 18. These contributions and their subsequent earnings are tax-free when withdrawn to pay for qualified education expenses.
Changes made by Congress during 2001, included major enhancements to Coverdell Education Savings Accounts, including the following:
- increased contribution limit
- increased income limits for married contributors who file joint tax returns
- entities may be contributors
- extending the contribution deadline
- modifying the definition of qualified expenses
- new rules coordinating Education Savings Accounts with education tax credits
- waiver of age restriction for certain special needs children
What is the contribution limit?
For 2001, the maximum contribution to all Coverdell Education Savings Accounts of any one designated beneficiary is $500. For 2002, and later, the annual per-designated-beneficiary contribution limit is raised to $2,000.
What is a qualified education expense?
A qualified elementary, secondary or higher education expense is one that is required for the enrollment or attendance by your child at an eligible educational institution.
These expenses include:
- tuition
- fees
- books
- supplies
- equipment
- academic tutoring
- special needs services
- room and board expenses
- uniforms
- transportation
- educational computer technology or equipment
- Internet access
Who can contribute to a Coverdell Education Savings Account?
The answer to that question is "almost anyone."
There are two key limitations:
- Each child can receive a total of the maximum allowed per year in contributions from all sources. It does not make a difference if this is done in a single account or multiple accounts designed to benefit the same child.
- In 2005, a person may be limited in the amount of their contribution if their modified adjusted gross income exceeds $95,000 for single filers or $190,000 for married tax filers. Above these income levels, the ability to contribute is phased out. If income exceeds $110,000 for single tax filers, or $220,000 for married tax filers, no contribution is allowed. Effective January 1, 2002, married individuals (filing a joint return) may make the maximum $2,000 contribution per designated beneficiary when their joint MAGI is $190,000 or less. The $2,000 limit is reduced and gradually phased out for joint filers when their combined MAGI is between $190,000 and $220,000. When their combined MAGI is $220,000 or more, married individuals filing joint returns may not fund a Coverdell Education Savings Account.
The Coverdell Education Savings Account does not require that the contributor must be a member of the family. Furthermore, EGTRRA clarifies that corporations and other entities (including tax-exempt organizations) are permitted to make contributions to the accounts, regardless of the income of the corporation or entity during the year of the contribution.
With this broad range of potential contributors, it is possible that more than one person may want to contribute for the same child. A coordinated effort should be encouraged to avoid excess contributions.
Can I roll over funds from another Education Savings Account?
You can roll over funds from one Coverdell Education Savings Account to a new or existing only. The funds, however, must benefit the same child or an eligible member of the child's family. A rollover contribution does not affect the annual contribution limit. Rollovers must be completed within 60 days of the initial distribution and are limited to one per 12-month period.
Am I allowed to change the beneficiary?
You may change the designated beneficiary (child). An example of why someone may wish to change the beneficiary is the current beneficiary has completed their education and there are funds remaining. The only stipulation is that the new beneficiary must be an eligible member of the family.
Who is a member of the family?
There are several possible family members that may be renamed as Coverdell Education Savings Account beneficiaries:
- children, grandchildren, and stepchildren
- brothers, sisters, stepbrothers, and stepsisters
- nephews and nieces
- parents, stepparents, and grandparents
- uncles and aunts
- spouses of all the family members listed above
It is important to remember that even with this extended range of family members, contributions can be made only for those under the age of 18, or individuals with special needs beyond age 18.
How does the age waiver for a special needs beneficiary work?
As a result of EGTRRA, effective January 1, 2002, designated beneficiaries with special needs:
- will be eligible to receive annual contributions after attaining age 18
- will not have his or her Education Savings Account balance distributed within 30 days after attaining age 30
- will be eligible to receive rollover contributions from qualified family members after attaining age 30
- will be eligible to be named as a designated beneficiary to a qualified family member's Education Savings Account after attaining age 30
What is the contribution deadline?
Contributions for the 2001 tax year must be made on or before December 31, 2001. Effective for taxable years beginning on or after January 1, 2002, the contribution deadline is the tax return due date for the taxable year, not including extensions (i.e. April 15).
For more information about paving the road to success for your child, please ask one of our representatives for more details. Our representative may also suggest that you seek advice from a competent tax advisor.
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