COLLEGE FUNDING
Today it takes a college degree
to get the job you could get with a high school diploma twenty-five
years ago. Do you have a child or grandchild or are you concerned
about helping another child pay for college? Anyone can establish
an account for a child and invest money for that child’s
education. These programs using fixed insurance products can be
used by persons at every economic level.
Coverdell Education
Savings Account
The old Educational IRA has gotten a bit of a makeover, and now
it's called the Coverdell Education.
New tax laws have made this plan much more attractive. When saving
for a child's post-secondary education, you can now contribute
up to $2,000 per year (per child) until the child is age 18. This
is significantly higher than the old limit of only $500. Contributions
are not tax deductible. However, withdrawals from the account
are completely tax free, including earnings, when withdrawn to
pay for qualified education expenses. (Remember that this is somewhat
similar to a Roth IRA: after-tax going in, tax-free coming out!)
Who Can Contribute
and How Much?
Anyone can contribute to a Coverdell Education Savings Account
as long as their income does not exceed certain limits (see below).
Keep in mind, however, that the $2,000 per year limit is PER CHILD,
regardless of the number of contributors or donors. For example,
if a grandparent contributes $1,200 for a child, the parent could
not contribute more than $800 for the same child.
The Coverdell Education Savings
Accounts will have a "manager" (often the parent) who
will need to monitor contributions for the beneficiary (child)
to help insure there are no excess contributions. Like Traditional
IRA's, excess contributions over $2,000 are subject to a 6% federal
tax penalty.
Income Limits
A donor may be limited as to the amount of their contribution
if their modified adjusted gross income exceeds $95,000 for single
filers, or $190,000 for joint filers. Contribution amounts are
gradually phased out between the incomes of $95,000 and $110,000
for single filers and $190,000 and $220,000 for joint filers.
Persons with income amounts above $110,000 (single) and $220,000
(joint) would not be able to contribute to a Coverdell Education
Savings Account.
How Long Can Benefits Stay In
the Account? The funds can remain in the account until the beneficiary
turns age 30. Any remaining funds could be rolled over to an another
qualified family member (see next section). Any funds left and
not rolled over by age 30 would be taxable to the beneficiary.
In addition, because the funds were not used for educational purposes,
there would also be a 10% penalty.
Rollovers
Rollovers can be made from an existing Coverdell Education Savings
Account to a new Coverdell Account if the new beneficiary is a
member of the original beneficiary's family. Family members would
include: Grandparents, Parents, and Spouses, Brother and Sisters,
Children and their Spouses, Stepchildren and their Spouses. This
could be particularly helpful if a family had several children.
Example:The oldest child in a family had a Coverdell Education
Savings Account and decided not to attend college. Their account
could be rolled to his brother or sister as long as it was done
prior to the oldest reaching age 30.
Suppose a beneficiary does not use all the money in his account
and has children prior to reaching age 30. Remaining funds could
be rolled to that original beneficiary's child(ren) prior to the
beneficiary reaching age 30. One could also rollover an existing
Coverdell Education Savings Account to another existing Coverdell
account for the same child.
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