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The
Coverdell Education Savings Account is an incentive to help parents and
students save for education. Up to $2,000 may be contributed to a
child’s Coverdell ESA each year; the limit was $500 before 2002.
Earnings on contributions will be distributed tax free, provided that they
are used to pay the beneficiary’s elementary or secondary school or
college education expenses.
Any
individual who meets adjusted gross income (AGI) requirements can make a
non-deductible contribution on behalf of a child under the age of 18. The
AGI requirements are $95,000 for single taxpayers and $190,000 for married
taxpayers. The $2,000 annual contribution limit is phased out for single
taxpayers with AGI of $95,000 to $110,000 and for joint filers with AGI of
$190,000 to $220,000.
While
a child may be the beneficiary of any number of Coverdell ESAs, the total
contributions for the child during any tax year cannot exceed $2,000.
Contributions
to a Coverdell ESA may be made until the due date of the contributor’s
return, without extensions.
Distributions
are tax-free as long as they are used for qualified education expenses,
such as tuition, books, fees, etc. This income exclusion is not available
for any expenses for which the Hope credit or the lifetime learning credit
is claimed for that student. If the distribution exceeds education
expenses, a portion will be taxable to the beneficiary and will be subject
to a 10% tax penalty. Exceptions to the penalty include death, disability
or if the beneficiary receives a qualified scholarship.
If
there is a balance in the Coverdell ESA at the time the beneficiary
reaches 30 years old, it must be distributed within 30 days. A portion
representing earnings on the account will be taxable and subject to a 10%
penalty. The beneficiary may avoid this tax and penalty by rolling over
the full balance to another Coverdell ESA for another family member. |
