Education Planning Common Questions |
Should I open a Coverdell education savings account?
Answer:
A Coverdell education savings account can play an important part in your college savings program. Once an account is open, you can contribute at any time during the year, and you even have until April 15 of the following taxable year to make a contribution for the current taxable year. In addition, contributions can be made by an entity, including a tax-exempt entity, on behalf of a selected beneficiary.
The main benefit of Coverdell ESAs is tax related. Specifically, money you withdraw to pay your child's college education expenses is completely tax free, including earnings. (Generally, distributions are tax free if they are not more than the beneficiary's education expenses for the year.) Coverdell ESAs have many favorable features:
- You can contribute up to $2,000 per year for a selected beneficiary
- You can use Coverdell ESA funds to pay elementary and secondary school expenses
- You can contribute to both a Coverdell ESA and a 529 plan (prepaid tuition plan or college savings plan) in the same year for the same beneficiary
- You can claim either the Hope credit (renamed the American Opportunity tax credit for 2009 and 2010) or the Lifetime Learning credit in the same year you take a tax-free distribution from a Coverdell ESA (though the expenses paid with the Coverdell ESA distribution can't be the same expenses used to qualify for the credit)
Before you consider opening a Coverdell ESA, though, you'll have to meet certain income limits. Single filers must have a modified adjusted gross income (MAGI) of $95,000 or less to make the maximum $2,000 contribution, and joint filers must have a MAGI of $190,000 or less. A partial contribution is allowed for single filers with a MAGI between $95,000 and $110,000, and for joint filers with a MAGI between $190,000 and $220,000.
Related Content - Saving For College
Common Questions
- Are government savings bonds risk free?
- Are savings bonds a good way to save?
- Can an UGMA/UTMA account reduce my child's financial aid for college?
- Do series EE bonds offer any special advantages if used for college savings?
- Should I open a Coverdell education savings account?
- Should I save for college in my name or my child's name?
- What are the rules for Coverdell education savings accounts?
- What is the CollegeSure CD?
- What is the college inflation rate?
The Basics
- Planning for the Cost of Higher Education
- Federal and State College Financial Aid
- Education Tax Credits
- State savings plans vs. prepaid tuition plans
