Accumulate More In A Coverdell ESA Account Vs A Taxable Account

What are the advantages of a Coverdell ESA?

Tax-deferral can have a dramatic affect on the growth of an investment. With the new Coverdell ESA (formerly known as the Education IRA) your contributions can grow tax-deferred and distributed income tax-free as long as distributions are used for qualified education expenses. These costs can include school uniforms, computers, and transportation for elementary or secondary school, public, private or religious.

An annual limit of $2,000 per year for any individual under age 18 applies. Once the beneficiary reaches age 18 they can take control of the account but funds must be used by the time the beneficiary turns 30 years of age or transferred to a younger sibling.

The ability to contribute to a Coverdell ESA is phased out for single filers with Modified Adjusted Gross Income (MAGI) between $95,000 and $110,000 and for joint filers with MAGI between $190,000 and $220,000. The annual contribution deadline is April 15 of the following year.

Savings and Assumptions
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This information may help you analyze your financial needs. It is based on information and assumptions provided by you regarding your goals, expectations and financial situation. The calculations do not infer that the company assumes any fiduciary duties. The calculations provided should not be construed as financial, legal or tax advice. In addition, such information should not be relied upon as the only source of information. This information is supplied from sources we believe to be reliable but we cannot guarantee its accuracy. Hypothetical illustrations may provide historical or current performance information. Past performance does not guarantee nor indicate future results.

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Additional Information

Coverdell Education Savings Accounts

The Coverdell education savings account (formerly the education IRA) is a tax-advantaged savings plan for post-secondary education. It is modeled on the standard IRA to give tax incentives to persons for saving for education.

Anyone may fund a Coverdell ESA for a single student (beneficiary); however, no more than $2,000 a year may be invested per student regardless of how many separate accounts are created. The contributions can be made until the student's 18th birthday. The contributions are not tax-deductible to the contributor and are subject to phase-out provisions based on the contributor's income; thus, after a certain amount of income, he or she cannot contribute. However, the earnings remain tax-free when they are withdrawn for qualified educational expenses. After the beneficiary attains age 30, withdrawals are no longer tax-free.

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Contribution Rules of Coverdell Education Savings Accounts

Anyone may fund a Coverdell education savings account (formerly education IRA) for a child (beneficiary). The maximum allowed contribution is $2,000 per year in aggregate, up until the beneficiary's 18th birthday, unless the beneficiary is a special-needs beneficiary. The earnings remain tax-free when they are withdrawn and used for qualified educational expenses. All assets must be distributed within 30 days of the beneficiary's attaining age 30, unless the beneficiary is a special-needs beneficiary.

It is important to note that contributions to Coverdell accounts are not tax deductible.

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Penalties on Withdrawals from a Coverdell Education Savings Account

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There are tax penalties for non-qualified withdrawals from a Coverdell education savings account. Non-qualified withdrawals are those that are not withdrawn for qualified educational expenses. The IRS will consider any non-qualified withdrawal to be taxable income. All such withdrawals are subject to income tax on their earnings as well as the 10 percent penalty on early distributions. In the event of the death or disability of the beneficiary, the 10 percent penalty will not apply.

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Definitions

Annual savings amount

The annual amount between $0 and $2000 you will set aside in the Coverdell account.

Number of years contributions are made

The number of years you plan to make contributions to the Coverdell account.

Before-tax return on savings

The return you anticipate to receive on your college savings accounts.

Marginal tax bracket

Unlike the tax-deferred Coverdell account, enter the tax rate you would pay on any earnings in an alternative taxable college savings account. This rate will be used for comparison purposes.

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