Wednesday, January 03, 2007

Coverdell Education Savings Accounts (ESA)

Coverdell Education Savings Accounts (ESAs) are designed to be used by those saving for a child's future educational expenses. Annual non-deductible contributions of up to $2000 per beneficiary can be made until the beneficiary turns 18. Withdrawals to pay higher education expenses of the beneficiary are tax-free as long as the money is used prior to the beneficiary reaching age 30.

The $2000 contribution is phased out for taxpayers with a modified AGI above $95,000 ($190,000 on joint return). No contribution to an ESA is allowed once the modified AGI is $110,000 ($220,000 on joint return). However, a grandparent, or other person under the earnings ceiling, can make the contribution to the child's account. You need to be careful here if other people are contributing to the account since only a maximum of $2000 can be contributed. Earnings in ESAs grow tax deferred.

If there are any proceeds left over when the beneficiary becomes age 30, the balance will be paid to the beneficiary within 30 days. There will be an income tax plus a 10% penalty tax if the proceeds are not used before the beneficiary reaches age 30. If the beneficiary dies before age 30, the balance will be paid to the beneficiary's estate, unless his or her legal representative changes the beneficiary to a surviving spouse or another family member under age 30. A legal representative is either a parent or a guardian.

If child doesn't want to go to college, you can change the beneficiary to another child under age 30.