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Whether your child is six months or ten years old, it's never too
early to start thinking about their college education. With the
enormous cost of higher education, it's important to plan ahead and
start saving early. A Coverdell Education Savings Account (formerly
known as an Education IRA) is a great way to start saving for
your child's education.
A Coverdell Education Savings Account (CESA) can be opened for a
named beneficiary under the age of 18. Annual contributions of
$2,000 can be made into a child's CESA.
Frequently Asked Questions About
Coverdell Education Savings Accounts
The "Economic Growth and Tax Relief and Reconciliation Act
of 2001" raised the contribution limit for the Coverdell
Education Savings Account to $2,000 per year. And starting in 2003
we will be able to make carry-back contributions. (That's when you
make a contribution for the previous year by April 15th of the
current year).
The law adds elementary and secondary school educational
expenses to the definition of qualified education expenses. Such
expenses include tuition fees, academic tutoring, special needs
services, books, supplies, equipment, room and board expenses,
uniforms, transportation, educational computer technology or
equipment and internet access.
School means any school that provides elementary or secondary
education (kindergarten through grade 12) as determined under state
law, including public, private or religious schools.
The law allows contributions for individuals with special needs
beyond age 18. And the age 30 limitation does not apply for
distributions for special needs beneficiaries.
Who can contribute?
Anyone who has MAGI (modified adjusted gross income for the
federal tax form) of up to $95,000 for a single filer or
$190,000 for joint filers in 2002
and later years. Some people with smaller MAGI may be
able to make smaller contributions. Contributions are not allowed:
- once the beneficiary of the CESA reaches age 18 (except for 2002 and later years
contributions after age 18 allowed for special needs
beneficiaries)
- in 2001 if a contribution is made to a state tuition
program for the same CESA beneficiary (does not apply to 2002
and later years)
How much can you contribute?
Contributions cannot exceed a total of $2000 per year for
all ESAs opened on the child's behalf per child.
Who can make deductible contributions?
No one can deduct
contributions.
What are the tax advantages?
- Withdrawals for
qualified higher-education expenses are tax free.
- Special-needs beneficiaries can withdraw funds tax-free to
pay for qualified education expenses at any age.
- For 2002 and later years, qualified education expenses may
include tuition, fees, books, computer equipment and
technology required for elementary, secondary &
post-secondary education.
- For 2002 and later years, a beneficiary may receive tax-free
distributions from a CESA in the same year he or she claims
the Lifetime Learning or HOPE Scholarship tax credits.
When can withdrawals be made without restrictions?
- Withdrawals are tax and penalty free only for qualified higher-education
expenses (earnings are subject to tax and penalty for other
withdrawals).
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Funds can be transferred from one child's account to
another child in the family.
Not intended as tax advice. Please consult a
tax professional.
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