Education IRA
What is an Coverdell Education Savings Account?
A Coverdell Education Savings Account (ESA) is an investment tool created for the purpose of paying for the future cost of a child's post-secondary education. The plan allows total after-tax contributions of $2000 per year for each child until they reach the age of 18. These contributions and their subsequent earnings are tax-free when withdrawn to pay for qualified educational expenses. Distributions not for payment of qualified higher education expenses are includable in gross income and subject to 10% penalty tax to the extent of any earnings.
Who can contribute to an Coverdell ESA?
The answer to that question is "almost anyone." There are three key limitations:
- Each child can receive a total of $2000 per year in contributions from all sources. It does not make a difference if this is done in a single account or multiple accounts designed to benefit the same child.
- A person may be limited in the amount of their contribution if their modified adjusted gross income exceeds $95,000 for single filers and $190,000 for joint filers. Above these income levels, the ability to contribute is phased out. If income exceeds $110,000 for single filers, or $220,000 for joint filers, no contribution is allowed.
- Contributions may be made by any person to a designated beneficiary’s Coverdell ESA during a year in which they also contribute to a qualified state tuition program (529 plan) for the same beneficiary, regardless of the amounts of such contributions.
Contributions
- Education contributions are nondeductible.
- The $2000 Coverdell ESA contributions limit is not reduced by any contributions made to other IRAs by the same individual for the same year.
Transferable
If a child for whom a Coverdell ESA has been established chooses not to go to college, then the Coverdell ESA is transferable to another family member. That child then becomes the designated beneficiary of the Coverdell ESA, and the same withdrawal rules apply.
Note: All assets in a Coverdell ESA must be distributed when the account’s designated beneficiary reaches 30. Amounts distributed at that time, unless used to pay qualified higher education expenses in that year, are includable in gross income and subject to an additional 10% penalty tax.
Contact Morgan Keegan today for more information about our Coverdell ESAs.
