Coverdell Accounts

03/03/2010

 
Parents, this one is for you.  I'm not sure how many of you have heard of a Coverdell Account, but it is a way to save money for private school where any earnings on the money in the account are tax-free.

I'm certainly not an expert on these accounts, but I don't see any reason not to check them out.  It could be a great way to reduce the cost of going to BCS.  I would just start by searching google for "coverdell".

I've included a aummary about the accounts from allbusiness.com:
Coverdell ESA's replace what used to be called Education IRAs. In 2002, the law was changed to make the accounts more attractive. As with anything tied to the IRS code, the rules for a Coverdell ESA can get a bit complex.

Unlike an IRA, you can't use a Coverdell ESA to defer taxes on your income. However, you can contribute up to $2,000 per child to an account per year. Any earnings on the money are tax-free when they are used for educational expenses.

Coverdell accounts aren't just for college. You can use a Coverdell account to pay the costs of elementary or secondary education, in public, private or religious institutions. These costs are fairly broadly defined and include uniforms, supplies and computers.

You don't have to be parent to establish a Coverdell ESA. You can contribute to the education of a niece, a cousin, a grandchild, even a neighbor's or friend's child. The only sticky point: No single child can receive more than $2,000 in contributions in a year, no matter who makes them.

There are income limitations. If you make more than $190,000 a year as a couple (or $95,000 as a single filer), the amount you can contribute is reduced. If you make more than $220,000 a year as a couple (or $110,000 as a single filer), you can't contribute at all.

However, in one of those weird quirks of the tax laws, you can--even if you're over the income limits--give the child the $2,000. The child can then make the contribution to the account, presuming, of course, that he or she doesn't have $95,000 a year in other income. You're right: This makes no sense. It does, however, follow the letter of the law. There may be gift tax restrictions if you give other money to the child.

Your contributions have to be in cash, and you must set up the account specifically as a Coverdell ESA, at any bank or IRS-approved financial institution.

You lose control of the account when the child turns 18. All funds have to be spent by the time the child turns 30. However, the account can be transferred to another family member under age 30, and family is fairly broadly defined.


 


Comments


Comments are closed.