college

Coverdell accounts

Among the various tax-favored college payment plans is the Coverdell Education Savings Account, previously known as an education IRA. Revamped as well as renamed, Coverdell accounts are earning a better grade from taxpayers who are looking to stash cash for Junior's schooling.

Up to $2,000 can be contributed annually to a Coverdell account (it was $500 in its earlier IRA incarnation). Plus, you have longer to put the money in, you can pay for more types of education expenses with the money, and you can combine Coverdell cash with other education tax breaks.

As of January 2004, if the plan is owned by a parent, it's considered a parental asset and therefore has a minimal effect on the amount of aid available. This was an important change: Prior to that date Coverdells were considered as a student's asset and as such could significantly increase the expected family contribution.

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 The contributions aren't tax deductible, but they do grow tax free and the funds can be withdrawn tax free as long as they are used to pay eligible schooling costs.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:

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  • 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 pre-college 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 of Lifetime Learning credits are claimed as long as the money is not used to pay for the same expenses.

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