Coverdell Education Savings Account

A Coverdell Education Savings Account can play an important role in helping pay for your child’s qualified elementary, secondary and higher education expenses.1

Benefits

  • Funds can be used for qualified elementary and secondary education expenses as well as college1
  • Tax-deferred earnings2
  • Tax-free distribution for qualified education expenses
  • May change beneficiaries to a qualified member of the same family
  • Great flexibility of investment choices

Considerations

  • Starting in 2011, contribution limits will revert to $500 per year and funds can no longer be used for elementary and secondary school expenses
  • Account owners can only invest cash, not appreciated securities
  • Beneficiaries must be under age 18 when contributions are made
  • Assets must be distributed by age 30 or earnings are taxed as ordinary income plus a 10% penalty
  • Beneficiary takes control of the account at age of majority, 18 or 21 years of age in most states
  • Nonqualified withdrawals are subject to ordinary income tax and a 10% federal tax penalty on earnings.

Details

Income Limits
  • Ability to contribute is phased out for joint filers with a modified gross income (MAGI) between $190,000 and $220,000 and single filers with a MAGI between $95,000 and $110,000.  Joint filers with a MAGI exceeding $220,000 and single filers exceeding $110,000 are not eligible.1
Annual Contribution Limits
  • If income requirements are met, $2,000 per year per beneficiary. 1
Tax Considerations
  • Earnings grow federal tax-deferred.2
  • Withdrawals for qualified expenses are federal tax-free.
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Disclosures:

  1. Effective through 2010 unless extended by Congress
  2. Earnings on non-qualified withdrawals are subject to federal income tax and may be subject to a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements.
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