What Are the Rules for Coverdell Savings Accounts?

As society advances, higher education becomes more important than ever. Fortunately, there are several strategies you can use to save for your child’s educational expenses. One such vehicle is the Coverdell Education Savings Account (ESA). The Coverdell ESA is a tax-deferred account you can use to hold investments for a child or other beneficiary’s future educational expenses.

Coverdell Savings Account Rules
During each tax year, you can contribute as much as $2,000 for each of your beneficiaries if you meet the Internal Revenue Service’s income requirements. To make the full $2,000 contribution as a single filer, your modified adjusted gross income (MAGI) cannot exceed $95,000. If you are married filing jointly, your MAGI cannot be more than $190,000. Single filers with MAGI ranging between $95,000 and $110,000 can make partial contributions, as can joint filers with MAGI ranging from $190,000 to
$220,000.

The contributions you make to the account are not tax-deductible. However, they can grow within the account tax-deferred, and distributions made from the account are taxfree as long as they are used for qualifying educational expenses.

Qualifying education expenses include tuition and the cost of books and school supplies. Funds from the Coverdell ESA can be used to pay qualifying expenses for elementary school, secondary school or higher education. Distributions for any year cannot exceed the beneficiary’s educational expenses for that year. If earnings are distributed from a Coverdell ESA but not used for qualifying educational expenses, they must be included in the beneficiary’s taxable income. In such cases, the IRS will also assess a 10 %
penalty.

Beneficiaries and Multiple Accounts
Coverdell account rules allow beneficiaries of ESAs to be anyone under the age of 18. After a beneficiary reaches the age of 18, no more contributions can be made to the account on the beneficiary’s behalf. You can open separate Coverdell accounts for multiple beneficiaries, and you can contribute up to $2,000 per year to each account.

However, no one beneficiary can receive more than $2,000 in contributions in any one year, regardless of how many accounts are open for that beneficiary. For example, if both you and your parents open an account for your child, the sum of yearly contributions to both accounts must stay within the $2,000 limit, which is something to think about when considering the many ways to save for college.

Weigh Your Options
Before investing in a college savings plan, compare your options and weigh the benefits. One alternative to consider in terms of flexibility is the Gerber Life College Plan, which allows you to use the money paid at maturity for anything – even expenses unrelated to college. Other college savings plans may impose a penalty if the money is not used specifically for college expenses. Also, with the Gerber Life College Plan, you don’t need to worry about stock market ups and downs. You’ll know exactly how much money will be available to you when your child is ready for college. So, if safety and security are important to you, or if you’re concerned about incurring penalties if you don’t use the money for college, the Gerber Life College Plan is one option may want to consider.

Sources:
http://www.irs.gov/publications/p970/ch07.html#en_US_2011_publink1000178403