Coverdell Education Savings Accounts (ESA)

Through the Coverdell ESA, a taxpayer can invest up to $2000 on an after-tax basis per child. Contributions must stop when a child reaches age 18. Earnings accumulate tax free, and money withdrawn to pay for qualified education expenses (tuition, fees, books, equipment, and room and board) is tax free. By the time the child reaches age 30, money must be transferred to a younger beneficiary or be withdrawn; otherwise the earnings are subject to tax and a 10 percent penalty. There is no longer an age limit for special needs beneficiaries. While more than one person can contribute to a Coverdell ESA for a child, no more than $2000 for that child can be saved in any year. Taxpayers who use Coverdell ESA funds may also claim the Hope or Lifetime Learning Credits, as long as the credits are claimed for different expenses than those paid from the ESA funds. Also, the child may have contributions made to both a Coverdell ESA and a state tuition program in the same year.

Married couples with a modified adjusted gross income (MAGI) under $190,000 and single taxpayers with a MAGI under $95,000 can contribute the maximum to either or both after-tax IRAs. At higher income limits, the amount that can be contributed phases out gradually until married taxpayers with a MAGI over $220,000 and single taxpayers with a MAGI over $110,000 cannot contribute to either account.

FOR MORE INFORMATION ON EDUCATIONAL TAX AND SAVINGS OPTIONS, VISIT THE FOLLOWING WEB SITES:

Return to Tax Credits