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5 Reasons Parents and Grandparents Consider a Coverdell


Eighteen years from now, it’s estimated that the average cost for a four-year college education at a public institution will have increased from approximately $37,000 to $108,000. This price is for tuition and fees alone, and does not include additional expenses such as books and room and board.

With this increase in costs, parents and grandparents are feeling an increased burden to financially help their children and grandchildren. Scholarships and grants can help offset the cost, but utilizing other tax advantaged plans such as the Coverdell Education Savings Account (ESA) is becoming increasingly popular.

The Coverdell ESA is gaining popularity in part due to these five benefits:

  1. Non-deductible contributions grow tax free.
  2. Withdrawals may be tax free for qualified expenses.
  3. Establishment is not restricted to family members.
  4. Beneficiaries have until age 30 to use the funds.
  5. Qualified expenses go beyond higher education to include elementary and secondary school expenses (K-12), which means younger children may benefit.

Unlike most state 529 plans, once the beneficiary turns 18, Coverdell ESA contributions cannot be made. That’s one reason it is recommended to start saving as early as possible to allow the additional time for the account to grow. The $2,000 yearly contribution limit is the total across all Coverdell ESA accounts for each child. For example, if the parents and grandparents each establish an account for the same child, their combined maximum yearly contribution for both accounts is still $2,000. Contributions beyond the limit may be subject to a tax penalty.

In addition, as with IRAs, eligibilty to contribute the yearly maximum to a Coverdell ESA is subject to an upper income limit. However, unlike IRAs, contributors are not required to have earned income to make contributions. That means you may gift the amount to the child first and have him or her make the contribution.

Keep in mind that federal tax and an additional 10% penalty may apply if withdrawals are not used for qualified education expenses. In addition, withdrawals cannot be used for the same expenses covered by other tax-free benefits received, such as scholarships and other education assistance programs. We recommend the guidance of a tax professional to properly coordinate contributions and withdrawals with other tax deductions for maximum advantage and avoidance of penalties.

Coverdell ESAs at a Glance:

Federal Income Tax
Withdrawn earnings are tax free for qualified higher education expenses and qualified K-12 expenses; however, contributions are not tax deductible.

Federal Gift Tax Treatment
Contributions are treated as completed gifts; the $14,000 annual exclusion applies.

Federal Estate Tax Treatment
The value of the Coverdell ESA is removed from the donor’s gross estate.

Maximum Investment
$2,000 per beneficiary per year combined from all sources

Qualified Expenses
Expenses include tuition, fees, books, supplies, equipment, special needs, room and board for minimum half-time students, and additional categories of K-12 expenses.

Time/Age Restrictions
Contributions must be made before beneficiary turns 18; beneficiary must use funds by age 30.

Federal Financial Aid
The Coverdell ESA is counted as an asset of the parent if the owner is parent or dependent student.

Income Restrictions
Contribution eligibility phases out for joint filers earning above $190,000 and single filers earning above $95,000.

It’s easy to set up a Coverdell ESA for your child or grandchild by calling 866.520.3201. One of our investment consultants will be happy to assist you.


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