Wealth &
Protection Planning

Coverdell Education Savings Accounts

Description

The Coverdell Education Savings Account (formerly known as the Education IRA) was created in 1998 exclusively for the purpose of paying for "qualified education expenses" for an "eligible" student.  Annual contributions are nondeductible, limited to $2,000 per benificiary and can only be made until the account holder or designated beneficiary reaches age 18.  The ability to contribute to a Coverdell ESA is phased out for single filers with Modified Adjusted Gross Income (MAGI) between $95,000 and $110,000 and for joint filers with MAGI between $190,000 and $220,000.  These limits are based on the income of the contributor.  The annual contribution deadline is April 15 of the following year. 

Objective
  • To provide an account that individuals can use to save for qualified education expenses for eligible students. 

A Coverdell ESA may be appropriate for any individual within certain income limits who wants to set aside funds for education expenses. 

Account Features
  • Eligibility - Any individual under age 30 may be the beneficiary of a Coverdell ESA.
  • Contributions - Anyone whose income is within the phase-out ranges (mentioned above) can contribute to a Coverdell ESA.  Contributions cannot exceed $2,000 per beneficiary per year.  Dollars can be invested in a variety of products, depending upon the investment objectives of the account owner.  
  • Distributions - The earnings portion of distributions that are used for non-qualified education expenses are subject to ordinary income tax, plus a 10% penalty.  No penalty exists for withdrawals due to death, disability, or scholarship. Any balance remaining in the Coverdell ESA must be distributed or transferred to another eligible family member when the beneficiary reaches age 30 or dies.  
  • Tax Considerations - Contributions are not taxed as they accumulate, and distributions used to pay for qualified education expenses are not subject to federal income tax.  
  • Financial Aid Considerations - Coverdell ESAs may impact financial aid eligibility.  They are considered assets of the account owner; if owned by the student or parent, Coverdell ESAs are considered parental assets, and this generally has less impact on financial aid.  

Contact a STRIVE Wealth Advisor for more information about Coverdell education savings accounts. 

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