4 Facts About Coverdell Education Savings AccountCoverdell Education Savings Account is a type of tax-deferred trust account which has been created by the U.S. government to assist families in funding educational expenses for beneficiaries 18 years or younger. It is legally allowed to setup more than one ESA for a single beneficiary; however, the total maximum contribution per year for any single beneficiary is limited to $2,000. Formerly known as education IRA, the ESA allows families to increase investment earnings through tax-deferral provided the funds are used for educational purposes. One of the major advantages of Coverdell ESA is that, although contributions to it are not deductible, the amounts deposited in the account grow tax free until distributed. Further, if distributed amount is less than a beneficiary’s qualified education expenses, his tax liability will be nil. This benefit is applicable not only for higher education expenses but also for elementary and secondary education expenses. Here are 4 facts to remember about distributions from Coverdell Accounts: 1. Distributions from Coverdell ESA are tax-free, but they should be strictly used for qualified education expenses, such as tuition, books and fees. 2. As stated earlier, there is no tax on distributions from Coverdell ESA. However, it is to be remembered that they should be spent on an eligible educational institution. All those public, private or religious school fall in this category which provides elementary or secondary education as determined under state law, and any college, university, vocational school, or other post secondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) post secondary institutions are included in this list.3. Many people would be surprised to know the Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. 4. It is possible that the distribution exceeds education expenses. In that case, a portion will be taxable to the beneficiary and will be subject to an additional 10% tax. However, there are certain exceptions to the additional tax. Those cases are exempted which include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship. If there is a balance in the Coverdell ESA at the time the beneficiary reaches age 30, it is compulsory for the beneficiary to collect it within 30 days otherwise it will be taxed. The tax can be avoided by rolling over the full balance to another Coverdell ESA for another family member. But, the new beneficiary of this rollover distribution must be under age 30 on the date of the rollover. |