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Planning for College with a Coverdell Education Savings Account

Education IRAs provide parents and others the opportunity to save for a child’s education expenses in a tax advantaged account.  The 2001 tax law increased the annual limit from $500 to $2000 for contributions to these accounts.  There is also a new income limit for those making the contributions.  Married couples filing a joint tax return can make a full $2000 contribution if their adjusted gross income is less than $190,000;  they can make a partial contribution if their AGI is between $190,000 and $220,000; and no contribution if their income is above $220,000.  For single taxpayers, the limit is one half of those amounts.

Earnings within the account are tax deferred and withdrawals are not subject to tax if they are used for qualified education expenses.  The new law expanded this definition to include expenses for elementary and high school expenses.  Withdrawals not used for qualified education expenses are subject to regular income tax and a 10% penalty.  Withdrawals must also be completed before the child reaches age 30.

Coverdell Education Savings Accounts function like IRA accounts and are available from most banks, credit unions, brokerage firms and mutual fund companies.  Investment options vary depending on the firm.  Usually there is considerable flexibility with “self-directed” type accounts.