Posted on Jun 17 2008 in Uncategorized by
A Coverdell Education Savings Account (ESA) is an investment tool
similar to a Roth IRA, except instead of retirement, the money is used
for education expenses. Unlike the “529″ and other plans that help you
save tax free for college education expenses, the ESA is the only
plan that allows you to save for K-12 education expenses as well!
What’s the tax advantage?
Contributions (deposits) to ESAs and interest earned accumulate tax
free, and distributions (withdrawals) are also tax free when used for
eligible education expenses.
What are the contribution limits?
Maximum contributions to ESA accounts are limited to $2,000 per student
per year, up to the student’s 18th birthday.* Almost anyone may
contribute, including grandparents, family friends, businesses, and
organizations. The contributions may all be made to one account, or
multiple accounts may be established for the same student, so long as
all accounts together do not exceed the $2,000 per year per student
contribution limit (or else penalties will be imposed). Also, there are
income limits for individual contributors. Their ability to contribute
to ESAs begins to phase out when their modified adjusted gross income
is more than $95,000 for single filers and $190,000 for joint filers.
Businesses and organizations have no such income limits.
What are the distribution limits?
Distributions must be used for eligible education expenses during the
same calendar year in which the expenses are incurred and within 30 days
of the distribution. All funds in the account must be distributed by the
student’s 30th birthday, or penalties will be imposed.* The funds may
also be rolled over into another ESA or some other education savings
account (a “529″ for example) without penalty, but the new account must
benefit the original student or a relative of the original student.
*Children with special needs are not subject to ESA age restrictions.
What are eligible education expenses?
Eligible expenses for K-college include books, supplies, equipment,
tutoring, tuition, computer hardware and software, and even Internet
access if your students are required to use the Internet in their studies.
Do homeschool expenses qualify?
Yes, in states where homeschools are legally classified as private
schools. In other states, homeschool expenses are not eligible.
Are there disadvantages to ESAs?
There are potential disadvantages to ESAs. First, they are rare in the
investment world. Finding a bank that offers ESAs and a banker who is
knowledgeable enough to gain your confidence could take some detective
work on your part. Next, account service fees and interest rates on
investments vary. It pays to do your homework by asking questions up
front and shopping around before opening an account. Also, you will have
to carefully coordinate withdrawals with other tax benefits (especially
Hope and Lifetime learning credits), and your income tax return could
become a bit more complicated. An experienced tax professional could be
a big help if this is not your area of expertise. Finally, and perhaps
most importantly, unless Congress takes action, certain ESA benefits
will expire after the year 2010: Elementary and secondary expenses
will no longer qualify, the maximum annual contribution will be reduced
to $500, and a tax will be imposed on withdrawals in the years that you
claim a Hope or Lifetime credit.
Where can I find more information?
- HSLDA’s article, “Some Home Schoolers Excluded from Education
Savings Accounts” http://www.hslda.org/docs/news
- IRS Pub. 970, “Tax Benefits for Higher Education”
- Web site: savingforcollege.com
- Local banks, accountants and financial planners.
Beryl Amedee is an experienced homeschool mom, legislative analyst, and
income tax return preparer. This article is intended as information
only, and is not to be used as either investment or tax advice.
Permission to reprint may be granted upon request by contacting Mrs.
Amedee. E-mail: firstname.lastname@example.org. Mail: 200 Rhett Place, Gray, LA
(c) 2008 Beryl Amedee