Advantages and Disadvantages of
Coverdell Education Savings Accounts
Advantages
- Withdrawals that are used to pay the beneficiary's qualified education expenses are completely income tax free at the federal level
- Qualified education expenses include elementary and secondary school expenses
- You have complete freedom to choose the investments you put in the account
- You can change the beneficiary without penalty if certain conditions are met
- You can contribute to a 529 plan and a Coverdell ESA in the same year for the same beneficiary without triggering a penalty
- A Coverdell ESA is considered an asset of the parent for federal financial aid purposes and assessed at a rate of 5.6 percent (distributions aren't counted as parent or student income)
Disadvantages
- You can contribute a maximum of only $2,000 each year*
- Your ability to contribute depends on your income--to make the full $2,000 contribution, single filers must have a modified adjusted gross income (MAGI) of $95,000 or less (a partial contribution is allowed if MAGI is between $95,000 and $110,000) and joint filers must have a MAGI of $190,000 or less (a partial contribution is allowed if MAGI is between $190,000 and $220,000)
- Contributions aren't allowed after the beneficiary reaches age 18, unless the beneficiary has special needs
- The account must be closed after the beneficiary reaches age 30, unless the beneficiary has special needs
- Withdrawals from a Coverdell ESA that are not used for the beneficiary's qualified education expenses are taxed and penalized (the earnings portion of the withdrawal is subject to a 10 percent federal penalty and is taxed at the rate of the person who receives the withdrawal)
- Depending on the financial institution, there may be fees associated with opening and/or maintaining the account
The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 that raised the annual contribution limit for Coverdell ESAs to $2,000 will expire on December 31, 2010. Unless Congress extends the law, after December 31, 2010, the annual contribution limit for Coverdell ESAs will revert to $500, the limit in effect prior to January 1, 2002.
|
 |
sign up for our newsletter
Check our latest published newsletters or read through our archive. If you are interested in accounting updates in your industry, we'd like to have you on our mailing list.
|
