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In 1997 Congress passed the Taxpayer Relief Act which, among other things, ushered in the concept of the Educational IRA. This plan created a new type of tax favored IRA designed to be used by investors whose goal is to save for a child's educational future.
In June of 2001, Congress expanded these plans through the The Economic Growth & Tax Relief Reconciliation Act. Since then, they are known as "Coverdell Accounts".
Contribution Limits
The total contributions for the beneficiary of this account cannot be more
than $2,000 in any year, no matter how many accounts have been established. A beneficiary
is someone who is under age 18 or is a special needs beneficiary.
Contributions to a Coverdell ESA are NOT deductible, but amounts deposited in the account
grow tax free until distributed. The beneficiary will not owe tax on the distributions if
they are less than a beneficiary’s qualified education expenses at an eligible
institution. This benefit applies to qualified higher education expenses as well as to
qualified elementary and secondary education expenses.
Tax Free Growth
Contributions to Educational IRA's are made with after tax monies. These monies accumulate and compound tax free and distibute federally tax-free providing the funds are being used to pay for qualified, higher educational expenses or other eligible expenses.
If these funds are not used before the 30th birthday of the beneficiary, the assets continue to grow tax free, but distributions after age 30 are fully taxable AND, if the beneficiary is under 59 1/2, there's a 10% IRS-imposed penalty (similar to an annuity of regular IRA).
The contribution amounts are phased out for individual taxpayers with AGI's above $95,000 and $150,000 for joint returns.
Tax Free Distribution
Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board. There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law.
Eligible institutions also include any college, university, vocational school or other post secondary educational institution eligible to participate in a student aid program administered by the Department of Education.
Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) post secondary institutions are eligible. The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.
Action To Take If you would like to learn more about Educational IRA's, please click HERE. |
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Fielder Financial Management, LTD.
All Rights Reserved.
Securities are offered through Girard Securities, Inc.
member FINRA, SIPC.
Mark R. Fielder, Registered Principal. CA. Insurance Lic. # 0690576.
