Designed to grow and protect money that you set aside for educational expenses, the Coverdell Education Savings Account (formerly known as the Education IRA) is a convenient and effective way to save funds for college for all those who qualify.
You can make full contributions to a Coverdell Education Savings Account on behalf of a child under the age of 18 unless you are:
- An individual who makes between $95,000 and $110,000
- A married couple that makes between $190,000 and $220,000
(For individuals or couples in these income ranges, your contribution will be phased out.)
Advantages
Tax-free withdrawals
Earnings on investments and withdrawals are tax free, provided distributions are used to pay for qualifying education expenses.
Flexible contributions
Even if you are currently funding a 529 College Savings Plan, you may still make contributions of up to $2,000 per year to a Coverdell Education Savings Account.
Ease of transfer
Funds in a Coverdell Education Savings Account that are no longer needed can be rolled into a second account for another eligible family member without experiencing any adverse tax consequences.
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529 College Savings Plan earnings grow tax deferred, and withdrawals for qualifying higher education expenses are free from federal income tax. If the distributions are non-qualifying, the earnings portion may be subject to income tax and a 10 percent penalty. Consult your tax advisor.
Coverdell Education Savings Account earnings grow tax deferred, and withdrawals for qualifying education expenses are free from federal income tax. If distributions are non-qualifying, the earnings portion may be subject to income tax and a 10 percent penalty. Earnings become taxable if assets are not distributed or transferred by the time the beneficiary reaches age 30. The 10 percent penalty may be waived in certain circumstances. This benefit is set to expire Jan. 1, 2013, unless extended by Congress. Consult your tax advisor.