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Sure you want your kids to have
the best college education, but can you afford it? Uncle
Sam may be able to help.
Among the various tax-favored college
payment plans is the Coverdell Education Savings Account,
previously known as an education IRA. When the account
was renamed, it also was revamped, and Coverdell accounts
now earn a better grade from taxpayers who are looking
to stash cash for children's schooling.
Increased contributions
Up to $2,000 can be contributed to a Coverdell account
(it was $500 in its earlier IRA incarnation).
Plus, you have more time to put
the money in, can pay for more types of education expenses
with the money and can combine Coverdell cash with other
education tax breaks.
The basic account setup remains.
While adults contribute to the savings plan, a child
age 17 or younger is named as the account's beneficiary.
The contributions aren't tax deductible, but they and
their earnings can be withdrawn tax-free as long as
they are used to pay eligible schooling costs.
New name,
better benefits
But that's where the similarity between the old education
IRA and the new Coverdell plan (renamed in honor of
the late U.S. Sen. Paul Coverdell of Georgia) ends.
In addition to the increased $2,000
contribution limit, the Internal Revenue Service now
allows:
- Money to be added to the plan
up until the April tax-filing deadline.
- Contributions for a child 18 or older
if the youngster has special needs.
- Any adult -- parents, grandparents,
godparents or friends -- to put money in a child's
education IRA, but the total put in the account from
all sources cannot exceed $2,000. There's a 6-percent
annual excess contribution tax if more than that is
contributed for the same child, even when the money
comes from different people.
- Higher income limits for contributors.
To contribute fully, a person must make no more than
$95,000 if filing as single taxpayer, $190,000 if
married filing jointly. Limited contributions are
allowed for single taxpayers earning up to $110,000
and married couples making up to $220,000. Beyond
those higher incomes, a person cannot contribute.
And remember, the contributions are simply for the
future education of the child. The contributor gets
no tax break for adding to the account.
- Money to be used for some precollege
expenses, including tuition, room and board, books
and computers for public, private or parochial elementary
and secondary schools.
- Money to be simultaneously contributed
for the same child to a Coverdell account and a state
college
tuition program.
- A distribution from the account
in the same year that the Hope
or Lifetime Learning credits are claimed as long
as the money is not used to pay for the same expenses.
Selecting
an account home
OK, you've determined that a Coverdell education savings
account is a worthwhile component of your child's overall
educational savings plan. So where do you put the money?
Any financial institution (a bank,
investment company, brokerage, etc.) that handles traditional
IRAs can help you set up and manage a Coverdell account.
You can put your contributions into any qualifying investment
vehicle -- stocks, bonds, mutual funds, certificates
of deposit -- offered at the institution that will serve
as the account's custodian.
If you want to diversify, you can
split the money up into several investments. There's
no limit on the number of Coverdell accounts that you
can establish for a child. The only limit is on the
total contributions: You can't put more than $2,000
a year away for the student, regardless of how many
accounts he or she has. Just be sure that management
fees for multiple accounts don't eat into your overall
savings return.
Unused
Coverdell money
If Junior decides college is not really for him, what
happens to any unused education IRA money diligently
contributed all these years? Then Junior pays when he
turns 30. He must take any balance in the account within
30 days of his birthday, and he'll owe tax on the earnings
plus a 10-percent penalty.
The IRS, however, offers a way out
of this taxable situation. Junior can rollover the full
balance to another Coverdell plan for another family
member. This could be a younger sibling, niece, nephew
or even his own son or daughter.
For more information on education
IRAs and other education tax breaks, check out IRS
Publication 970, Tax Benefits for Education.
Freelance writer
Kay Bell writes Bankrate's tax stories from her home
in Austin,
Texas, and blogs on tax topics at Don't
Mess with Taxes.
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Updated: March 30, 2007 |
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