Coverdell ESA

Formerly known as the "education IRA," this savings alternative is a trust or custodial account used for education expenses. Investment options may include a wide range of securities.

Contributions

  • $2,000 per year per beneficiary
  • Income contribution limit $95,000 to $110,000 for single tax filers, $190,000 to $220,000 for married filers
  • Age limitation: contributions stop when child turns 18

Deductions

  • Not tax-deductible

Withdrawals

  • Account owner controls withdrawals; beneficiary has legal right to be named account owner at age of majority
  • Proceeds must be used to cover expenses for college/post-secondary programs in the U.S.; some foreign programs and expenses from elementary and high school also qualify

Taxation

  • Account earnings are tax-deferred
  • Qualified withdrawals are tax-free
  • Nonqualified withdrawals are taxed at the account owner's rate
  • 10% penalty on earnings for nonqualified withdrawals

Other

  • Plans are assets of the account owner
  • Reduces federal aid by 2.6% to 5.64% of the 529 plan's value if the parent is the account owner
  • Plan beneficiaries can be changed if the beneficiary is under age 30
  • Plan funds are removed from the donor's estate

 

Source: Raymond James MFRM-01630518