With school letting out you might be focused on summer plans for
your children (or grandchildren). But the end of the school year is also a good
time to think about Coverdell Education Savings Accounts (ESAs) — especially if
the children are in grade school or younger.
One major advantage of ESAs over another popular education
saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t
limited to college expenses; they also can fund elementary and secondary school
costs. That means you can use ESA funds to pay for such qualified expenses as
tutoring and private school tuition.
Other benefits
Here are some other key ESA benefits:
-
Although contributions aren’t deductible, plan assets
can grow tax-deferred.
- You remain in control of the account — even after the
child is of legal age.
- You can make rollovers to another qualifying family
member.
Limitations
The ESA annual contribution limit is $2,000 per beneficiary. The
total contributions for a particular ESA beneficiary cannot be more than $2,000
in any year, no matter how many accounts have been established or how many
people are contributing.
However, the ability to contribute is phased out based on
income. The phaseout range is modified adjusted gross income (MAGI) of
$190,000–$220,000 for married couples filing jointly and $95,000–$110,000 for
other filers. You can make a partial contribution if your MAGI falls within the
applicable range, and no contribution if it exceeds the top of the range.
If there is a balance in the ESA when the beneficiary reaches
age 30 (unless the beneficiary is a special needs individual), it must
generally be distributed within 30 days. The portion representing earnings on
the account will be taxable and subject to a 10% penalty. But these taxes can
be avoided by rolling over the full balance to another ESA for a qualifying
family member.
Would you like more information about ESAs or other
tax-advantaged ways to fund your child’s — or grandchild’s — education
expenses? Contact us!
