Education Savings
FAQs
Coverdell
What are the benefits
of a Coverdell Education Savings Account IRA?
Who can establish a Coverdell
Education Savings Account?
How much may I contribute?
How do I know if I am eligible
to make a contribution?
Is my contribution deductible?
What is the deadline for making
a contribution?
What are considered qualified
higher education expenses?
What is an eligible educational
institution?
When can funds in a Coverdell
Education Savings Account be withdrawn?
May I change the child designated
as the beneficiary?
What if the child designated
as beneficiary of the Account does not continue
their education?
529 Plan
What is a 529 plan?
Why should I invest in a 529
plan when I can not be sure that my child will
attend a public university in my state?
Can I transfer my existing
Coverdell education savings accounts and U.S.
savings bonds into a 529 plan?
If I open up a 529 plan in
a certain state, will my child need to go to
a school in that state?
Will a 529 plan affect my child’s
ability to qualify for financial aid?
Q: What are the
benefits of a Coverdell Education Savings Account
IRA?
A: Tax Free Earnings. The interest earned on
a Coverdell Education Savings Account is not
subject to federal income tax when used for
qualified higher expenses.
Q: Who can establish
a Coverdell Education Savings Account?
A: Almost anyone can contribute to a Coverdell
Education Savings Account on behalf of a child
under the age of 18. The contributor is not
even required to be related to the child designated
as beneficiary of the Account.
Q: How much may I
contribute?
A: The child designated to receive the benefit
of the Coverdell Education Savings Account can
receive annual contributions from any contributor
or combination of contributors up to a maximum
of $2,000 per year for tax years 2002 and forward.
Q: How do I know
if I am eligible to make a contribution?
A: If you are single and have a modified adjusted
gross income (MAGI) of no more than $95,000
or are married filing jointly and have a modified
adjusted gross income of no more than $190,000
(in 2002 and forward), you will be able to contribute
to a Coverdell Education Savings Account.
Q: Is my contribution
deductible?
A: No. However, all interest earned on a Coverdell
Education Savings Account is tax-free when the
amount withdrawn does not exceed and is applied
to "qualified" education expenses.
Q: What is the deadline
for making a contribution?
A: Contributions for 2004 and forward can be
made anytime during the year up through the
tax-filing deadline for that year, not including
extensions. Generally, this means contributions
can still be made up through April 15th for
the prior tax year.
Q: What are considered
qualified higher education expenses?
A: Qualified education expenses include: tuition,
fees, books, supplies, and equipment required
for the enrollment or attendance of the designated
beneficiary, at an eligible educational institution
regardless of whether the student is enrolled
on a full-time, half-time or less than half-time
basis.
Expenses also include room and board for students
who are enrolled at least on a half-time basis
and amounts paid or incurred to purchase tuition
credits under a qualified state tuition program
for the benefit of the designated beneficiary.
For Tax year 2004 and forward, qualified education
expenses will also include elementary and secondary
school expenses such expenses include: tuition
fees, academic tutoring, special needs services,
books, supplies, equipment, room and board expenses,
uniforms, transportation, educational computer
technology equipment, and internet access.
Q: What is an eligible
educational institution?
A: An eligible educational institution includes
post-secondary institutions offering credit
towards a bachelor's degree, an associate's
degree, a graduate level or professional degree
or other recognized post-secondary credentials.
This includes colleges, universities, and vocational
schools. The institution must be eligible to
participate in the Department of Education Student
Aid Programs.
For tax year 2004 and forward, an eligible
education institution will also include elementary
and secondary schools (kindergarten through
grade 12) as described by state law, including
public, private or religious schools.
Q: When can funds
in a Coverdell Education Savings Account be
withdrawn?
A: Distributions from a Coverdell Education
Savings Account may be made at any time. As
long as the distribution is applied to payment
of the qualified education expenses of the designated
beneficiary, it will generally not be considered
taxable income for the child.
The Coverdell Education Savings Account must
be used before the designated beneficiary attains
the age of thirty (30) or the funds will be
distributed and generally considered taxable
income for the designated beneficiary. However,
prior to the age of thirty (30), the funds may
be rolled over into a Coverdell Education Savings
Account for another eligible family member.
Q: May I change
the child designated as the beneficiary?
A: Yes. You may change the designated beneficiary
of the Coverdell Education Savings Account from
the original child to a new beneficiary, as
long as the new beneficiary is a family member
of the original child and under the age of 18.
The change of designated beneficiary of the
Coverdell Education Savings Account is not treated
as a distribution.
Q: What if the
child designated as beneficiary of the Account
does not continue their education?
A: The Coverdell Education Savings Account must
be used before the designated beneficiary attains
the age of thirty (30) or the funds will be
distributed and considered taxable income for
the designated beneficiary. However, prior to
the age of thirty (30), the funds may be rolled
over into a Coverdell Education Savings Account
for another eligible family member.
If distributions are made from a Coverdell
Education Savings Account that are not considered
to be qualified education expenses, the earnings
portion of the distribution will be included
in the gross income of the child and an additional
10% IRS tax penalty may apply.
Q: What is a 529
plan?
A: It is an investment plan operated by a state
designed to help families save for future college
costs. As long as the plan satisfies a few basic
requirements, the federal tax law provides special
tax benefits to you, the plan participant (Section
529 of the Internal Revenue Code).
Q: Why should I
invest in a 529 plan when I can not be sure
that my child will attend a public university
in my state?
A: There is a misconception that 529 plans are
only geared to families that send their children
to a state school. There are two general types
of 529 plans: prepaid programs and savings programs.
The states offering prepaid tuition contracts
covering in-state tuition will allow you to
transfer the value of your contract to private
and out-of-state schools (although you may not
get full value depending on the particular state).
If you decide to use a 529 savings program,
the full value of your account can be used at
any accredited college or university in the
country (along with some foreign institutions).
You can look up eligible institutions on the
Education Department's school code search page.
Recent tax law changes now permit higher education
institutions to offer their own 529 prepaid
programs. These will allow you to target your
tuition prepayment to the sponsoring institution
(or group of institutions). While none of these
programs have begun yet, we could see one fairly
soon.
Q: Can I transfer
my existing Coverdell education savings accounts
and U.S. savings bonds into a 529 plan?
A: Yes. You can accomplish these transfers without
triggering tax, but you should be careful about
ownership issues. For instance, the Coverdell
ESA (formerly the Education IRA) is effectively
owned by your child and so it may not be proper
to transfer the funds into a 529 account that
is owned by you. Also, for 529 distributions
after the 2010 "sunset" the untaxed
earnings transferred into the 529 plan will
be subject to tax when withdrawn from the 529
plan. Also note that the tax-free transfer of
U.S. savings bond redemption proceeds into a
529 plan requires that you meet all the qualification
requirements for the education exclusion, including
the income limits in the year of the redemption.
Q: If I open up
a 529 plan in a certain state, will my child
need to go to a school in that state?
A: 529 college savings plans are set up so that
the full value of the account can be used at
any accredited college or university in the
U.S. However, certain 529 pre-paid plans may
restrict using the funds out of the state.
Q: Will a 529 plan
affect my child’s ability to qualify for
financial aid?
A: Guidance from the U.S. Department of Education
says that a 529 plan is counted as an asset
of the parent or other account owner in determining
eligibility for federal financial aid. As a
result, your maximum expected contribution from
the 529 account will be 5.6% for each academic
year. Assets held in the child’s name,
such as with custodial or education savings
accounts, are assessed at a much higher percentage:
35%. You should speak with your tax advisor
concerning your particular situation.
Education
Account Comparison Chart
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