Mon. Jan 24th, 2022

Coverdell Education Savings Accounts (CESAs) were previously called Education IRAs and were of limited value in savings for education costs because the annual contribution was limited to only $500 and the income phase-out ranges were $95,000 to $110,000 for single filers and $150,000 to $160,000 for joint filers. EGTRA increased the allowable annual contribution to $2,000 and the income phase-out ranges to $190,000 to $220,000 for joint filers. The beneficiary of a CESA must be under age 18 in those years when contributions are made to the account and amounts remaining in the account must be distributed within 30 days after the beneficiary reaches age 30 or dies. Qualified expenses include public, private, and religious elementary and secondary school expenses and the age limit does not apply to beneficiaries with special needs. This provision makes the CESA very attractive for parents and grandparents who intend to send their children or grandchildren to private grade schools.

Amounts held in a CESA may be distributed and put into a CESA for a member of the beneficiary’s family. Such rollovers will be tax-free to the distributee as long as the rollover occurs within 60 days of the distribution. Likewise, amounts held in a CESA may be rolled over into another CESA for the benefit of the same beneficiary.

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With regard to tax treatment, contributions are no tax deductible but earnings are tax deferred and distributions are excludable from gross income to the extent that the distribution does not exceed the qualified higher education expenses incurred by the beneficiary during the year in which the distribution is made. The income portion of distributions not used for education expenses is taxable and subject to a 10% penalty. Contributions to a CESA are treated as a gift from the contributor to the beneficiary at the time of the contribution and are subject to the current $13,000 annual gift tax exclusion.

CESAs offer much greater investment flexibility, with investors able to invest in the funds of their choice, including individual stocks and bonds. With regard to the effect of a CESA on qualification for federal financial aid, it is treated as an asset of the account owner. Unless the account owner is the student, it has a low impact on financial aid eligibility because qualified distributions from a CESA are not counted as income on the FAFSA.

By rahul