Permanent Expansion of Coverdell Accounts
by william_lako
 Money Talks Blog
January 29, 2013 08:24 AM | 906 views | 0 0 comments | 15 15 recommendations | email to a friend | print | permalink

The American Taxpayer Relief Act of 2012 permanently extended the expanded Coverdell education savings accounts (ESA). Coverdell accounts are tax-advantaged educational savings account that you can establish for any child under the age of 18. The Economic Growth and Tax Relief Reconciliation Act of 2001 increased the annual contribution limit for Coverdell ESAs to $2,000 per beneficiary. This increased limit was extended through 2012, and the recent tax law makes the expansion permanent.

While there are many different investment vehicles to save for education, one unique feature of Coverdell Accounts is that funds can be used for qualified expenses at elementary and secondary schools, including public, private, and religious schools.

As a parent, if you are committed to sending your children to private elementary or secondary school, you’re likely aware that financial aid is nearly nonexistent at this level of education. Most families pay out of pocket for private elementary or secondary schools. With a Coverdell education savings account, you can withdraw money tax free for these school expenses.

Contributions to Coverdell ESAs are made with after-tax dollars, and there is no tax deduction for contributions. However, distributions that are used to pay qualified education expenses are income tax free at the federal level. In Georgia distributions are also exempt from state income tax. Your modified adjusted gross income for the year must be less than $110,000 if filing a single return or $220,000 if married filing jointly to be eligible to open a Coverdell ESA. Contributions are then limited as your modified adjusted gross income increases between $95,000 and $110,000 if filing a single return or between $190,000 and $220,000 if married filing jointly.

Coverdell ESAs may not be the right savings vehicle for every family saving for education expenses. However, the permanent expansion for contributions and the ability to use funds for elementary and secondary schools may make them worth considering.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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