Coverdell ESA Questions
Is a Coverdell ESA a useful way to
save for my child’s future?
If you’ve questioned whether it was worth
contributing to a Coverdell ESA (formerly
known as the Education IRA) in the past, you
may want to reconsider now that it’s new and
improved. The key advantage of a Coverdell
ESA remains the same — tax — and
penalty-free withdrawals (including
earnings!) for qualified education expenses.
The yearly contribution is $2,000 per child,
per year. Qualified expenses apply to not
only college costs, but also to primary and
secondary education.
Am I eligible to contribute to a
Coverdell ESA?
If you’re married and you file a joint tax
return, your likelihood of being eligible to
make Coverdell ESA contributions is better
than ever. Contact Avanta to see if you’re
eligible.
When is the contribution deadline for
Coverdell ESAs?
The contribution deadline for Coverdell ESAs
is the federal income tax deadline. For
example, Coverdell ESA contributions for
2006 will be allowed until April 15, 2007 –
just like contributions to traditional and
Roth IRAs.
So now you have even more time to make
sure you set aside that money your child
needs for primary, secondary or college
education expenses.
Can I use a Coverdell ESA to fund my
child’s private elementary school costs?
Yes, you can. A Coverdell ESA can be used
not only for higher-education expenses but
also for K-12 costs. And qualified primary
and secondary education expenses aren’t
limited to just tuition, fees and room and
board. They also include uniforms,
transportation, extended day care, and even
home computers.
With more qualified reasons for tax- and
penalty-free withdrawals, Coverdell ESAs are
a smarter way than ever to help fund your
child’s education.
Can I use a Coverdell ESA in
combination with other education savings
incentives?
Under the old rules, contributions to and
distributions from a Coverdell ESA prevented
the use of other tax-favored options in the
same year -- including the Lifetime Learning
and HOPE Scholarship tax credits. Now you
can claim either of these credits for your
child and exclude from gross income any
amounts distributed from that same child’s
Coverdell ESA. The only caution is you can’t
claim a credit and take a Coverdell ESA
distribution for the same expenses in the
same tax year.
You can also put money into a 529 state
college savings plan in the same year that
you contribute to a Coverdell ESA – or
withdraw from both in the same year.
What do we do with Coverdell ESA funds
if our child decides not to go to college?
Withdrawals of earnings from a Coverdell ESA
are only tax-free if they’re used for
qualified K-12 or higher-education expenses.
But you can roll any unused funds into the
Coverdell ESA of a family member. That not
only includes siblings and step-siblings of
the original Coverdell ESA beneficiary, but
also nieces, nephews, spouses, children, and
other relatives. The magic number is 30 –
the new beneficiary must be under age 30 at
the time of the rollover and must use the
funds before he or she turns 30. If no one
is eligible to receive the rollover funds,
you can withdraw your contributions income
tax- and penalty-free. Keep in mind that you
will still pay taxes and a penalty on the
earnings.
While participation in a retirement plan
doesn’t change how much you can contribute
to an IRA, it can affect whether or not
you’re eligible to deduct your contributions
to a traditional IRA on your tax return. But
keep in mind that as long as you’re under
age 70˝ and you’ve earned compensation, you
can always make nondeductible contributions
to a traditional IRA and benefit from
tax-deferred earnings.
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