Coverdell Education Savings Accounts
Formerly known as Education IRAs, the Coverdell Education Savings Account is another way for parents to save for elementary, secondary and college education. The Coverdell is very similar to a Roth IRA. It allows a non-deductible contribution to a specifically designated investment trust account. It will grow free of federal income taxes and withdrawals from the account will be completely tax-free as well.
Eligibility Requirements
There are two eligibility requirements to contribute to a Coverdell Education Savings Account:
- The beneficiary of the account must be under the age of 18 at the time of the contribution (the beneficiary does not need to be a relative).
- The donor’s income must be below $190,000 in modified adjusted gross income ($95,000 for single filers) in order to contribute the maximum of $2,000. If your combined income is greater than the limit, you may allow your child to make the contribution.
Disadvantages
There are several limitations during the years of contribution and withdrawals that make the Coverdell Education Savings Account not as beneficial as other saving devices:
- You need to be careful that accounts established by other family members for the same beneficiary do not cause the total contribution limit for the beneficiary to exceed $2,000.
- The small annual contribution limit is reduced slightly by the small maintenance fee charged by the financial institution.
- The account will ultimately go to your child if not used for college.
- Unlike the 529 plan, you do not have control.
- A Coverdell account has a harmful effect on a student’s ability to receive financial aid.
- The account is seen as a child’s asset, not the parent’s.
- Also, the withdrawal is seen as income, which reduces the amount of financial aid the student will receive the following year.
- The funds must be fully withdrawn by the time the beneficiary reaches age 30 or it will be subject to tax and penalties.
- Coordinating withdrawals with other tax benefits, such as the Hope or Lifetime Learning Credits can be tricky. This is true with the 529 plans as well.
- There are some age restrictions, so older people with college plans may not find this a beneficial saving tool.
We’ll help you determine whether the Coverdell Savings Account is the best tool to save for your child’s education.
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