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What is a Coverdell Education Savings Account?

Parents and grandparents take note: saving for a childs college education through at tax-exempt Coverdell account is the most efficient way to optimize an investments rate of return.

By: Catherine Wynne

IRA Insights

A Coverdell Education Savings Account is a trust or custodial account that is created or organized according to IRS guidelines for the purpose of paying qualified higher education expenses of the designated beneficiary of the account. The account must be designated as a Coverdell Education Savings Account when it is created in order to be treated as a Coverdell (ESA) for tax purposes.

The per-beneficiary contribution is currently $2,000 annually, and it is permissible for those savings to be used for primary, secondary and post secondary school expenses. Whether or not you can contribute to a Coverdell is dependent on your modified adjusted gross income. Consult with your accountant on whether or not you qualify.

The following is a list of rules and benefits for the Coverdell ESA. Saving for higher education needs to start early and a tax-exempt savings plan is essential. Keep these things in mind:

• When used for educational expenses, the funds in your Coverdell are completely tax-exempt.
• At age 30, the funds in the Coverdell must be distributed to the beneficiary or may be re-assigned to a new beneficiary.
• If not used for education, the funds in the Coverdell are taxed as ordinary income upon distribution.
• No contributions may be made once the beneficiary reaches 18 years of age.
• The Coverdell may be self-directed and invested in partnership with Roth IRAs and 401(k)s.
• The same prohibited transaction rules apply as they do with an IRA or Qualified Plan.
  

Need more information? A good resource for parents for what schools cost and how to save can be found at http://apps.collegeboard.com/fincalc/efc_welcome.jsp

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