The beneficiary of the account must be under the age of 18 at the time of the contribution. The first step in establishing a Coverdell ESA is determine if you are eligible to contribute to an ESA. See our list of Coverdell ESA providers Coverdell ESA eligibility and income limits You will need to meet certain requirements in the years you wish to make the contributions, and in the years you take withdrawals. Your account will grow free of federal income taxes, and if all goes well, withdrawals from the account will be completely tax-free as well. They both allow you to make an annual non-deductible contribution to a specially designated investment trust account. If you know how a Roth IRA works, then you have a pretty good idea of how an ESAs works. This means you lose some degree of control. You cannot simply refund the account back to yourself like you can with most 529 plans. Your contribution goes into an account that will eventually be distributed to your child if not used for college. The relatively low contribution limit means that even a small annual maintenance fee charged by the financial institution holding your ESA could significantly affect your overall investment return. If total contributions exceed $2,000 in a year, a penalty will be owed. However, you need to be careful when accounts are established by different family members for the same child. In 2002, the contribution limit was increased from $500 per child to the much more reasonable level of $2,000. For example, tax law prohibits ESA funding once the beneficiary reaches age 18. There are certain eligibility requirements in the year you wish to contribute to the ESA, which means that not everyone will find them useful. Withdrawals are not reported as student or parent income as long as it is tax-free for federal income taxes. The account is considered an asset of the account custodian, typically the parent. The ESA is on equal footing with the 529 plan when applying for federal financial aid. In fact, even if you like the 529 plan you may still decide to contribute the first $2,000 of savings for each child into a Coverdell account. A key distinction between 529 plans and Coverdell ESAs is that ESAs allow you to self-direct investments, while 529 plans only allow you to select from a menu of investment options determined by the program manager. In 2002, the re-named Coverdell education savings account became a very attractive college savings vehicle for many people, including families that wish to save for elementary and secondary school expenses, as certain K-12 expenses were added to the list of qualified expenses. Read about what benefits Coverdell education savings accounts have to offer and how they compare to 529 college savings plans.Ĭompare the features of a Coverdell education savings account with other college savings options side by side: You can modify your comparison by selecting which options to look at, and what features you’d like to compare.Ĭompare Coverdell features Benefits of Coverdell ESAs Tax-free withdrawals from 529 plans are limited to $10,000 in tuition expenses for K-12 schools, but when using a Coverdell ESA, qualified elementary and secondary education expenses also include books, supplies, equipment, academic tutoring and special needs services in connection with enrollment or attendance at an eligible school.Īlso, Coverdell ESAs have much lower maximum contribution limits per child, and they are only available to families below a specified income level. However, in addition to college expenses, certain K-12 purchases are also considered qualified when using a Coverdell Education Savings Account (ESA). These accounts work very much like a 529 plan, offering tax-free investment growth and tax-free withdrawals when the funds are spent on qualified education expenses.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |