|With higher education costs climbing steadily upward nearly 8% per year many families
are particularly concerned about accumulating enough money to put their children through
college. College cost projections are continually increasing. Based on the latest averages from
The College Board and recent average annual college cost increases, a child who entered
kindergarten in 1995 will face four-year college costs of nearly $100,000 if he or she chooses to
attend a public college in 2007. For a private college, costs will probably be double
The tax law provides an option to save for college
expenses - the
"Coverdell Education Savings Account". While not technically an individual retirement account, the
tax law allows families to contribute up to $2000 per tax year for each child under age 18 into
these tax favored savings plans.
The beneficiary must be a child under age 18.
Anyone, including parents, grandparents, other family members and friends, and the
child/beneficiary can make non tax deductible total Coverdell Education Savings Account
contributions per child of up to $2000 each
tax year provided the contributors Modified Adjusted Gross Income is not more than
$110,000 ($220,000 on a joint tax
return). There is a phase out between $95,000 and $110,000 (between
$190,000 and $220,000
on a joint tax return). No contributions can be made in a tax year when any amount is
contributed to a qualified state tuition program.
Earnings in the Coverdell Education Savings Account
are tax free until withdrawn.
Qualified education expenses are:
|room and board under certain conditions.|
The child/beneficiary is not taxed on withdrawals to pay qualified higher education
If the balance of the Coverdell Education Savings Account
isn't used by the time the student reaches age 30,
it must be withdrawn, or "distributed." At this point, the funds would be taxed
and subject to a 10% tax penalty. This can be avoided if the balance is rolled over to
another Coverdell Education Savings Account benefiting another family member, such as a younger sister or
There is a 10% tax penalty on any taxable
distributions from a Coverdell Education Savings Account. The
tax penalty does not apply if the Coverdell Education Savings Account distribution is due to:
|because the beneficiary received a tax free scholarship on an educational assistance
|Coverdell Education Savings Account|
If tax free treatment for any part of
Coverdell Education Savings Account withdrawal is not waived no HOPE
Tax Credit or
Lifetime Learning Tax Credit can be taken for that tax year on your tax
return. If either the Lifetime Learning
Tax Credit or the education income tax exclusion for withdrawals from a Coverdell Education Savings Account
the HOPE Tax Credit may not be taken on your tax return. The education income exclusion is not available in any
tax year that a HOPE Tax Credit or Lifetime Learning Tax Credit is elected
on your tax return with respect to a student.
Report Coverdell Education Savings Account
withdrawals on Form 8606.