Coverdell Education Savings Account
January 20, 2021
As an alternative to student loans or regular education plans, the Federal Government offers Coverdell Education Savings Account. This is actually an incentive for parents and students so that they can save a portion of their earnings or income in order to finance education expenses.
Why Get a Coverdell Education Savings Account?
This is no doubt one of the first questions asked. Before 2002, when Coverdell Education Savings Account was first known by its old name, Education IRA, the only lure for people is the idea of a tax-free income. The contributions you make on your account are sheltered from taxes and are, therefore, tax deductible come next tax assessment.
Today, while Coverdell Education Savings Accounts retain their tax deductibility, people who sign up for it incur other benefits as well. In fact, families are beginning to see the potential of Coverdell Education Savings Account as a vehicle for them to save money for school expenses in both elementary and secondary education.
Note the following items entailed when you sign up for a Coverdell Education Savings Account:
* There are eligibility requirements that you must meet before you can make contributions to the Coverdell Education Savings Account. One such requirement is that the child must be a minor, below 18 years of age. This is because tax law prohibits funding through the Coverdell Education Savings Account if the beneficiary is 18 years old and above. If you started making contributions on the account when the child was still a minor, then upon reaching 18 continued contributions will have to be stopped.
* Total contributions to the Coverdell Education Savings Account should not be more than $2,000 in a year. Otherwise, a penalty, in monetary terms, shall be imposed. This is important to remember, especially if the Coverdell Education Savings Account is established by different family members.
* If the contributions in your Coverdell Education Savings Account are not used for college, they will be given to your child or the beneficiary. In effect, you will lose some degree of control over your money, since you cannot jut refund it to yourself, unlike what happens in most 529 savings plans.
* If you are planning to apply for federal financial aid, your Coverdell Education Savings Account is similar to a regular 529 plan. That means, the account is an asset. Moreover, when you make withdrawals from the account and for as long as they are federal-tax free, they are not reported as income of the student or parent.
How Does Coverdell Education Savings Accounts work?
If you understand how Roth IRA works, then you already have an idea of how Coverdell Education Savings Accounts work. Basically, you make yearly non-deductible payment to your account, which will grow but without charges from federal income taxes.