college

Using a Coverdell education savings account

Judy O'ConnorDear Tax Talk,
I have an education IRA for my daughter. Can I use it to pay for off-campus housing while she is attending a university? If so, how do I know the maximum amount that can be used for room and board?
-- Heather

Dear Heather,
If you meet the IRS requirements, you may be able to pay for off-campus housing with the education IRA that you have for your daughter.

Education IRA accounts are now known as Coverdell Education Savings Accounts.

Student sitting against tree on phone © arek_malang/Shutterstock.com

Although contributions to them are not tax deductible, the funds deposited grow tax-free until they are distributed, as long as the distributions are used for qualified education expenses. Another little-known benefit of these accounts is that they are not just for college and can be used for elementary and high school education.

So let's hit the list of what the requirements are for your daughter:

  • First, she has to be attending an "eligible postsecondary school," which means any university, college or vocational school that is eligible to participate in a student aid program administered by the U.S. Department of Education.
  • Next, she needs to be enrolled at least half time, which means she is taking at least half of the full-time academic workload as determined by the school she is attending.
  • Finally, the room and board expenses that will qualify cannot be more than the allowance for room and board as determined by her school (the IRS calls this "cost of attendance"), or the actual amount charged if she were to reside at the school.

She can also use the account to pay for tuition, fees, books, supplies and equipment, so keep that in mind, too.

Thanks for the great question.

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