A Coverdell Education Savings Account was originally introduced in 1997 as an Educational IRA. In 2001, Congress expanded its benefits and renamed it the Coverdell Educational Savings Account (ESA). A Coverdell ESA trust or custodial account created for the purpose of paying the qualified education expenses of a designated beneficiary of the account. When the account is established, the designated beneficiary must be under 18 years of age, or a special needs beneficiary. For the purposes of a Coverdell ESA, qualified educational expenses include postsecondary school, or even an eligible elementary or secondary school. An eligible elementary or secondary school is any public, private, or religious school that provides elementary or secondary education (K-12) as determined by State Law. The good news about Coverdell ESAs is that American Taxpayer Relief Act of 2012 permanently extended the annual contribution rate of $2,000.00 per year, per child.
As I stated the annual contribution limit is $2,000.00 per year, per designated beneficiary. The designated beneficiary is the individual named in the document that creates the trust or custodial account, and who will receive the benefit of the funds in the account.
Coverdell ESAs can only be used to pay for qualified educational expenses. These expenses include:
· Tuition and Fees;
· The Cost of Books;
· Supplies and Other Equipment;
· And in Some Situations the Cost of Room and Board
Qualified elementary and secondary school expenses include expenses for tuition and fees, and academic tutoring. In the case of a special needs beneficiary; books, supplies and other equipment, room and board, uniforms, transportation, extended day programs, computer technology, equipment, and internet access.
The contribution deadline for a Coverdell ESA for 2013 is December 31, 2013. The maximum contribution of $2,000.00 begins to phase out at certain income levels. The income limitation for a Coverdell for a taxpayer filing as single is Modified Adjusted Gross Income (MAGI) between $95,001.00 and $110,000.00. For married filing joint the MAGI limitations are $150,000.00 - $160,000.00.
A nice thing about Coverdell accounts is that, the parent has some sort of control of the account. You are named custodian or trustee of the account, for the benefit of your child. Because the beneficiary of the ESA is a minor at the time contributions are made, an adult is named the “responsible individual” when the ESA is first established. So, in short, the parent retains some sort of control.
The contributions to a Coverdell ESA are not tax deductible. They work similar to a Roth IRA, where you are not given a tax deduction, and when a distribution is made, there is no tax on the earnings provided that the distribution is made for qualified educational expenses. In addition, there can be no contribution to a Coverdell ESA once the beneficiary reaches age 18.
The assets of a Coverdell ESA can be withdrawn at any time. As I previously mentioned, in order for the distribution to be tax free it has to be for qualified educational expenses. Coverdell ESA assets must be used before the student reaches age 30. If the assets are distributed to the beneficiary after age 30, the distributions are generally considered taxable income to the beneficiary. An exception to this rule is made for beneficiaries with special needs; they are not subject to age restrictions. To avoid the amount being taxable to the beneficiary, the amounts in the Coverdell can be rolled over into a Coverdell for another eligible family member before the primary beneficiary reaches age 30.
As you can see, a Coverdell ESA is a powerful plan that can, not only, help you pay for college; it can help you pay for private school as well.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, and Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle
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