Financial Focus: Coverdell education savings accounts


(6/3/2020)

With PHIL ANDERSON

Tuition is rising and showing no signs of slowing down. We’ll show you one way to save for the future. 

 

The cost of educating a college student has skyrocketed, including an increase in tuition, room and board, and fees, not to mention supplies, such as textbooks. Add in general inflation and continued cost increases, and by the time your children or grandchildren enroll, you’re likely to face a fairly expensive bill.

Among the many educational savings opportunities available is the Coverdell Education Savings Account (Coverdell ESA).  

A Coverdell ESA, formerly known as an Education IRA, is a simple and reliable way to finance a future education. Any single individual making less than $110,000 a year in modified adjusted gross income (MAGI) or married couple (if filing a joint return) making less than $220,000 a year MAGI is eligible to open a Coverdell1. That means aunts, uncles or even grandparents can open an account for any beneficiary under 18. Contributions can be made to the account up until the beneficiary turns 18. 

One of the drawbacks to a Coverdell is the yearly contribution limit. Annual contributions can total only $2,000 per beneficiary from all contributors. Contributions are not tax-deductible; however, withdrawals for a qualified educational expense are tax- and penalty-free. A qualified educational expense can include tuition, fees and books for a child at a private elementary or secondary school, or a public or private college. Withdrawals can be made as soon as the account is opened. 

All of the money from the account must be withdrawn within 30 days after the beneficiary’s

30th birthday. Any money withdrawn after the 30 days is taxable and also subject to a 10 percent penalty.2 You can avoid taxes and penalties by changing the beneficiary on the account to another family member under 30.3

Coverdell contributions must be made in cash. If you wish to contribute another asset, like stock, you must sell it, report the gain or loss, and then contribute the proceeds. Children can contribute to a Coverdell subject to custodianship and beneficiary requirements.

Saving for college for your children or grandchildren can be a daunting task, but by working with a financial professional and using tools like the Coverdell ESA, you may be able to do so more effectively and with less stress. 

 

1,3 www.collegesavings.org 

2 https://www.investopedia.com/university/retirementplans/esa/esa3.asp

 

This column is provided and paid for by Phil Anderson, as a service to the Winona area.  Phil Anderson is the owner of Financial Services of Winona.  He is a CERTIFIED FINANCIAL PLANNER™ and can be reached at 507-454-2355.

Securities America and its advisors do not provide tax or legal advice. Please consult with your tax or legal professional regarding your individual situation.

Securities offered through Securities America, Inc., Member FINRA/SIPC.  Advisory services offered through Securities America Advisors, Inc.  Financial Services of Winona and Securities America Companies are separate entities.

Written by Securities America for distribution by Phillip L. Anderson.

 

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