During these tough economic times more and more families are asking how saving for college can be made easier on their wallets. Part one of this series introduced the Coverdell ESA or Education Savings Account (more commonly recognized by its former name: the Education IRA).
In this segment we will review the advantages of investing in this popular college savings vehicle.
Advantages of Investing in a Coverdell ESA
- Earnings are tax deferred.(1)
- Withdrawals used for qualified education expenses are tax-free.(2)
- You may make tax free withdrawals to pay for private elementary and high school expenses
- Like retirement IRAs, you have from January 1st until April 15th of the following year to make the current year’s ESA contribution
- Although the ESA must be used by the age of 30 and distributions cannot exceed the actual educational expenses the IRS does allow certain transfers to members of the beneficiary’s family.(2)
- For more information visit www.irs.gov.
Now that you know about the advantages to choosing a Coverdell ESA, please check back for our next articles to learn what the IRS requires you to do when setting up a Coverdell ESA in order for it to be eligible for special tax treatment. In addition, we will discuss what the IRS considers to be “qualified education expenses” and therefore eligible for tax free withdrawals when used by the designated beneficiary.
(1)In general, the designated beneficiary of a Coverdell ESA can receive tax free distributions to pay qualified education expenses. (IRS http://www.irs.gov/taxtopics/tc310.html)
(2)In general, the designated beneficiary of a Coverdell ESA can receive tax free distributions to pay qualified education expenses. The distributions are tax free to the extent the amount of the distributions do not exceed the beneficiary’s qualified education expenses. If a distribution does exceed the beneficiary’s qualified education expenses, a portion of the earnings is taxable. Amounts held in the account must be distributed when the designated beneficiary reaches age 30. Certain transfers to members of the beneficiary’s family are permitted. (IRS http://www.irs.gov/taxtopics/tc310.html)
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Be sure to check back for the next segments of this series to learn more about:
- IRS Requirements to set up a Coverdell ESA
- What is a Coverdell ESA? (What is an ESA?)
- Advantages of Investing in a Coverdell ESA (see above)
- What does the IRS consider to be qualified education expenses?
- Will Congress extend The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (which previously extended several provisions within the Coverdell Education Savings Account (ESA) through Dec. 31, 2012) or will they let it expire?