Cory Burnell on Saving Options for College: Part 2

Coverdell Education Savings Accounts (ESAs) are similar to the 529 college plans as previously discussed in Saving Options For College: Part 1. According to the IRS, a Coverdell ESA is a “trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account.” The beneficiary is not considered the owner of the account and is not consider the beneficiary’s money when applying for financial aid.
The beneficiary must be under the age of 18. It is generally a tax-advantaged source of money if it is used to pay for educational expenses. A Coverdell ESA can be used for education expenses such as tuition, books, room and board, computers, and more. These expenses can be covered from kindergarten through high school, college, and graduate school. Even though a Coverdell ESA have wider qualified expenses, people still make the mistake and often use the funds to pay for education expenses that are not qualified. These expenses will be taxed a 10 percent penalty tax.
Contributions made to the ESA must be in cash and are not deductible. ESAs have lower maximum contribution limits and are only available to families below a specified income level. There is not a limit on the amount of accounts the beneficiary has but in a year time span, it cannot exceed $2,000. If your contributions do exceed $2,000 in a year, a penalty will be owed and the deposits will be subject to a 6 percent tax. For individuals, the ability to contribute is only available if your gross income is below $95,000. For couples filing jointly, the income must be below $190,000.
The tax law also prohibits ESA funding once the beneficiary reaches the age of 18. The account must be fully withdrawn by the time the beneficiary is 30 years of age, or else it can be penalized and taxes will be paid on it. The portion left in the account will be subject to a 10 percent penalty tax. The exception to these rules is if the beneficiary is a special needs beneficiary.
If interested, talk to your financial advisor to see which college plan will work best for you. Keep up with my series of blogs on Saving Options For College on my website CoryRyanBurnell.com!