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withdrawn to pay for qualified education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.
Neither
American National nor its agents
provide legal or tax advice. Please
consult your attorney or tax advisor
for your specific situation.
