Coverdell Education Savings Account

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Coverdell Education Savings Account

An account into which one may deposit funds on a tax-deferred basis, on the assumption that they will be used to pay for the education of the account holder. The funds are invested in a portfolio, much like an IRA or another retirement account. If the funds are in fact used for education, withdrawals from a Coverdell account are tax-exempt up to the total cost of education. Importantly, any tax liability on a Coverdell account is assessed at the account holder's bracket, rather than the contributor's. This protects the account holder from an excessive tax liability in the event a wealthy parent made most or all of the contributions. It was formerly called an education IRA.

Coverdell Education Savings Account

A special individual retirement account opened on behalf of a child under age 18. Contributions of up to $2,000 annually may be made by anyone who meets specified income limits. Contributions are not tax-deductible, but earnings grow tax-deferred until withdrawn. Money withdrawn prior to the child turning age 30 to pay for elementary, secondary, or postsecondary education expenses after high school is not subject to federal income tax. Formerly called Education IRA.

Coverdell Education Savings Account (ESA)

A tax-favored savings plan under which any number of taxpayers may contribute up to a total of $2,000 per year per eligible beneficiary. Contributions are nondeductible. Earnings withdrawals are tax free and penalty free if they do not exceed the amount of qualified education expenses for the year.
References in periodicals archive ?
When a beneficiary in a Coverdell ESA attains age 30, the balance in the account must be distributed to him within 30 days of this birthday [IRC section 530(b)(1)(E)].
A 529 Savings Plan or Coverdell ESA could help you and your family invest for the cost of higher education ahead of time.
The Coverdell ESA features tax-free earnings and funds can be used for elementary, secondary and college education expenses.
Establish a coverdell ESA or a state 529 plan for college expense.
for 2012) Code sections 529 530 Benefit name Qualified Coverdell ESA tuition program Benefit Tax-free Tax-free earnings earnings Tuition and fees Yes Yes Books and supplies Yes Yes Now and board Yes Yes Phaseout Single None $95,000-$110,000 range Married $190,000-$220,000 (for (for contributions) 2012)
Nevertheless, parents and grandparents may want to fully fund a Coverdell ESA for precollege children each year before putting any money into a 529 plan.
Talk to a bank or investment firm for more information or to set up a Coverdell ESA.
Contributions may no longer be made to Coverdell ESA after beneficiary turns 18.
Like 529 savings plans, Coverdell ESA funds available for the beneficiary's education depend solely on investment performance.
94) As with 529 Plans, a Coverdell ESA is exempt from federal income tax, but is subject to the same rules as a charitable organization regarding taxation of unrelated business income.
00 Table 6: Coordination of Tax Incentives-Scholarships, Credits, Coverdell ESA Assume that the following expenditures were made: Tuition and fees $15,000 Books, supplies, equipment 4,000 University-provided room & board 6,000 Total expenses $25,000 Sources of funds were: Scholarship $5,000 Coverdell ESA 15,000 ($10,000 earnings/$5,000 principal) Total funds $20,000 Scenario One--Take the Lifetime Learning Credit Apply the scholarship exclusion, which applies to tuition and fees and books, etc.