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Who may contribute, how much, and for how long?
Anyone - not just parents or grandparents - may fund a Coverdell Education Savings Account for a child. The account is opened in the child's name. While there is no requirement to be
a relative of the child, the person funding the account must meet certain income limits to be eligible to contribute. Corporations, trusts, and other non-individual entities may also contribute
to a Coverdell Account. Contributions by non-individuals are not subject to income limits.
Your income determines whether you may fund a Coverdell Education Savings Account
| Eligibility |
Adjusted Gross Income |
|
Single Filer |
Joint Filer |
| Full |
Up to $95,000 |
Up to $190,000 |
| Partial |
$95,001 to $110,000 |
$190,001 to $220,000 |
| None |
$110,001 and up |
$220,001 and up |
How much can I contribute?
The annual limit for contributions is $2,000. If more than one person contributes to the account, or establishes a separate account in the child's name, contributions to all of the
accounts in the name of one child may not exceed a total of $2,000 a year.
How long can I contribute?
As long as a child is under age 18, annual contributions may be made. Contributions may be made on behalf of individuals over the age of 18 who have "special needs" - i.e., who
require additional time to complete their eduation due to physical, mental or emotional condition (including learning disability.) Also, contributions may be made as late as April 15 of the
following year.
How does a Coverdell Account save taxes?
While contributions to a Coverdell Education Savings Account are not tax-deductible (they are made with after-tax dollars for a child), any growth of the account is tax-deferred. And
when the money is withdrawn and used for tuition, room, board, books, or other education related supplies, it is tax-free. (Please note that, if you claim a Hope or Lifetime Learning
tax credit, or take the new deduction for tuition payments, some portion of a Coverdell Account withdrawal will be taxable, even when used for college. That's because the tax law will
not allow you to "double-dip" by claiming multiple tax breaks for the same expense.)
How is a Coverdell Account different from other ways to save for college?
In general, a Coverdell Account is more flexible than other options. This matrix compares a Coverdell Account to 529 Savings Plans and Series I Bonds and Series EE Bonds (issued January
1990 and later).
| |
Coverdell |
529 Savings Plan |
Series I Bonds
Series EE Bonds (issued Jan. 1990 and later) |
| Overview |
Investment account established on behalf of a child for educationl expenses |
Qualified tuition plan operated according to Sect. 529 of the Internal Revenue Code |
Government bonds eligible for favorable tax treatment under the "Education Bond Program" |
| Eligibility |
Anyone |
Anyone |
Bonds must be owned by the parent(s) unless the student is 24 years old or older |
| Available through |
The Huntington Investment Company |
The Huntington Investment Company |
Banks, credit unions, savings institutions, direct from U.S. Treasury |
| Contribution limit annually |
$2,000 annually |
Plan-specific |
$30,000 face value annually; ($60,000 for couples); in denominiations fron $50 to $10,000 |
| Tax advantages |
Tax-deferred growth, tax-free withdrawals |
Contributions may be partially/completely tax-deductible; withdrawals are tax-free |
Interest partially or completely excluded from Federal income tax |
| Eligible institutions |
Any public/private college or other post-secondary institution, as well as elementary or secondary schools |
Any accredited college or university and some vocational schools |
Post-secondary college institutions, including colleges, universities and vocational schools |
| Qualified expenses |
Wide range (tuition, room and board, fees, supplies) |
Tuition, fees, room and board, supplies and equipment |
Tuition and fees only (books, room and board do not qualify) |
| Income level restrictions |
Less than $110,000 for single filers and $220,000 for joint filers |
None |
For single taxpayers up to $72,600; for married taxpayers filing jointly, up to $116,400 |
| Investment Options |
Wide flexibility |
Plan administrators invest assest. |
Government bonds |
| Assignable to other relatives? |
Yes |
Yes |
No. Previously purchased bonds may be re-registered from child's to parent's names. |
| Impact on Hope / Lifetime Learning Tax Credits |
None if tax credits claimed in the same year as tax-free withdrawals are applied to different expenses |
None if tax credits claimed in the same year as tax-free withdrawals are applied to different expenses |
Yes. Tax credits claimed in the same year I or EE bonds are redeemed reduce amount of interest |
Can I contribute to a Coverdell Education Savings Account and 529 Savings Plan in the same year?
Yes.
Is a Coverdell Account only for college expenses?
No. While college is a major educational expense, the Coverdell Account has broad educational applications. It can also be used to pay for other post-secondary institutional expenses,
as well as public or private elementary or secondary schools.
What type of expenses are covered by a Coverdell Account?
Tuition, fees, books, supplies, uniforms and equipment such as computers. Also, room and board for students enrolled on at least a half-time basis.
How long can money remain in a Coverdell Account?
While contributions must end by the time a child reaches age 18, the money may remain in the account until age 30. (There is no age limit for a child with special needs.) Other than
that, there is no withrawal schedule. The money may be withdrawn as wanted - in as many or as few of the student's school years as desired.
What if the student doesn't use all the money in the Account?
As long as a withdrawal is used for eligible higher education expenses, it is tax-free. But if the money or some portion of it has not been used for higher education expenses by the time
the account beneficiary (the child for whom it was established) has reached age 30, the beneficiary must do the following:
- Withdraw the money
- Pay income tax on the entire growth portion of the account
- Pay a 10% penalty
In order to avoid the income tax and 10% penalty, an unused account may be transferred to a sibling or to the child of the beneficiary. The account does not count against the $2,000 annual
contribution limit for the person receiving the account. Further, the account will not be taxed when withdrawn if used for educational expenses.
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