If you plan to put away some money for the education of your children or grandchildren, a good place to start may be a Coverdell Education Savings Account.
You may set aside up to $2,000 a year for a designated beneficiary, under age 18, for use to cover qualified expenses for either qualified higher education or qualified elementary or secondary school. No contributions can be made to a Coverdell after the beneficiary reaches age 18, unless he or she has special needs.
Although the money you contribute is not deductible from your current taxable income, the account grows tax-deferred, and distributions used for qualified educational expenses are also tax-free.
A Coverdell account is one of two popular tax-advantaged college savings programs along with 529 education savings plans. Some parents also use Uniform Transfers to Minors Act accounts to help fund their children’s college education.
Who can contribute?
Any individual (including the beneficiary) can contribute to a Coverdell as long as their modified adjusted gross income (MAGI) for the year is less than $110,000, or less than $220,000 if filing a joint return. However, contribution limits are reduced with MAGI greater than $95,000 for single or $190,000 for joint filers.
Organizations, such as corporations and trusts, can also contribute to a Coverdell account, and may do so without income restrictions.
While several people can contribute to a Coverdell account for the same beneficiary in any given year, the total of all contributions cannot exceed $2,000. However, you may contribute up to $2,000 for several different beneficiaries in any one year. For example, if you have two children or grandchildren, you may contribute up to $2,000 for each of them, as long as the total contributions received by each child from all contributors is no higher than $2,000.
You should be aware, however, that the assets in a Coverdell plan will likely reduce the beneficiary’s eligibility for need-based financial aid. Assets held in any pre-paid tuition plans and college savings plans are treated as parental assets in the calculation of the expected family contribution toward college costs.