Coverdell Education Savings Account

Coverdell Education Savings Accounts (CESAs) were formerly called Education IRA and have a limited value of savings for education costs because the annual contribution was limited to only $ 500 and phase-out ranges of earned income were $ 95,000 to $ 110,000 for single filers and $ 150,000 to $ 160,000 for joint filers. EGTRA increased the annual contribution to $ 2,000 and permitted ranges of income phase-out at $ 190,000 to 220,000 for joint filers. The beneficiary of a CESA must be under age 18 in years when contributions are paid and amounts remaining in the account must be distributed within 30 days after the beneficiary reaches age 30 or dies . Eligible expenses include public, private and religious elementary and secondary spending and the age limit does not apply to beneficiaries with special needs. This arrangement makes it very attractive to parents and grandparents who are planning to send their children or grandchildren to private schools as CESA.

Money held in a CESA may be distributed and put into a CESA for a family member of the beneficiary. These reports will be tax free to the distributee as long as the rollover occurs within 60 days of distribution. Similarly, the amounts held in a CESA can be switched to another CESA to the same payee.

As regards the tax treatment, the contributions are deductible, but earnings are tax deferred and distributions are excluded from gross income to the extent the distribution does not exceed eligible expenses incurred by the Higher Education beneficiary during the period in which the distribution is made. The portion of the distributions of income is not used for tuition is taxable and subject to a penalty of 10%. Contributions to a CESA are treated as a gift from the donor to the recipient at the time of contribution and are subject to the current $ 13,000 annual gift exclusion from tax.

CESAs offer flexibility much greater investment, with investors able to invest in funds of their choice, including stocks and individual bonds. Regarding the effect of a CESA on the classification of financial assistance from the federal government, it is considered an asset of the account holder. Unless the account holder is the student, it has little impact on financial aid eligibility because qualified distributions from a CESA are not counted as income on the FAFSA.