Trans World Assurance Blog

Trans World Assurance: Financial Aid 101 (Part 4)

Posted on Thu, Jul 21, 2011

Coverdell Accounts

college planning 101 2A Coverdell Education Savings Account (ESA)
is a savings account created as an incentive to help parents and students save for education expenses. The total contributions for the beneficiary (who is under age 18 or is a special needs beneficiary) of this account in any year cannot be more than $2,000, no matter how many accounts have been established. The beneficiary will not owe tax on the distributions if, for a year, the distributions from an account are not more than a beneficiary’s qualified education expenses at an eligible education institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.

Generally, any individual (including the beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if the individual is filing a joint return). The $2,000 maximum contribution per beneficiary is gradually reduced if the contributor's MAGI is between $95,000 and $110,000 ($190,000 and $220,000 if the contributor is filing a joint return).

Usually, MAGI for the purpose of determining your maximum contribution limit is the adjusted gross income (AGI) shown on your tax return increased by the following exclusion from your income: foreign earned income of U.S. citizens or residents living abroad, housing costs of U.S. citizens or residents living abroad, and income from sources within Puerto Rico or American Samoa. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

Distributions are tax-free as long as they are used for qualified education expenses, such as tuition, books, fees, etc., at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Refer to Publication 970 for more details. If the distribution exceeds education expenses, a portion will be taxable to the beneficiary and will be subject to an additional 10 percent tax. Exceptions to the additional 10 percent tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

If there is a balance in the Coverdell ESA at the time the beneficiary reaches age 30, it must be distributed within 30 days. A portion representing earnings on the account will be taxable and subject to the additional 10 percent tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member.

 

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Tags: Trans World Assurance, college planning, 529 plan, college funding, save for college, Coverdell Accounts