Coverdell Education Savings

The Taxpayer Relief Act of 1997 created the Education IRA, now known as the Coverdell Education Savings Account. Its sole purpose is to help you pay for your child's education expenses, such as tuition, fees, books, supplies, equipment, and in some cases, room and board and computers. The Economic Growth and Tax Relief Reconciliation Act of 2001 improved these options.

The deadline for making a Coverdell contribution is the tax return deadline for the year for which the contribution is being made (usually April 15 of the following calendar year) not including extensions.

Unlike Traditional IRAs, contributions to a Coverdell are never tax-deductible. However, a Coverdell offers you the potential for tax-free withdrawals - including earnings.

The total contributions each year to each child's Coverdell cannot exceed $2,000. If you're eligible, you can contribute the full amount for each child. For example, if you have three children and each has his or her own Coverdell, you can contribute $6,000 ($2,000 to each).

You can contribute the full amount if you are a:

1. Single filer with Modified Adjusted Gross Income (MAGI) up to $95,000
2. Joint filer with MAGI up to $190,000

You can make contributions of less than the full amount if you are a:

1. Single filer with MAGI between $95,000 and $110,000
2. Joint filer with MAGI between $190,000 and $220,000

If your income exceeds these amounts, you cannot make a regular Coverdell contribution for that year.

You can make contributions to a child's Coverdell until he or she reaches the age of 18. This age limit does not apply to special needs beneficiaries. This is a person who requires additional time to complete his or her education because of a physical, mental or emotional condition (including a learning disability).

No. Anybody who meets the income requirements can open and contribute to your child's Coverdell. This includes grandparents, aunts and uncles, family friends and anyone else who wants to pitch in to your child's education fund. Corporations, tax-exempt organizations and other entities can also make Coverdell contributions, and there are no income limits on these contributors. However, the total annual contributions to all Coverdells for each child can't exceed $2,000.

Every Coverdell must have one, and only one, "responsible individual" to oversee the account. This person decides when funds will be withdrawn and if and when funds will be rolled over to the Coverdell of a family member. You can be the "responsible individual" as long as you are a parent or legal guardian of the child. The child can serve as the responsible individual after becoming an adult.

As the responsible individual, you can withdraw funds at any time. However, to avoid tax consequences from the withdrawal, you must use the funds to pay for qualified education expenses for your child (the designated beneficiary) before he or she reaches age 30 (except that the age 30 limit does not apply to a special needs beneficiary).

Qualified expenses include tuition, fees, books, and equipment required for enrollment or attendance at nearly any post-secondary educational institution (public, nonprofit or proprietary). Certain room and board expenses also may qualify. Qualified expenses also include these same expenses for elementary and secondary education, and the purchase of computer technology or equipment that is used by the beneficiary and the beneficiary's family while the beneficiary is in school.

If your child (the designated beneficiary) decides not to go to college or leaves school before all the funds are withdrawn, you can roll unused funds into the Coverdell of another child in your family. The beneficiary of the Coverdell who receives the unused funds must be under the age of 30 (except that the age 30 limit does not apply to a special needs beneficiary).

Family members of the designated beneficiary who are eligible to receive unused funds include (but are not limited to) spouses, siblings, step siblings, nieces, nephews, parents, aunts, uncles, grandparents, children and grandchildren. Of course, some of these categories will be eliminated immediately, since the new designated beneficiary must be under the age of 30 at the time of the rollover (except that the age 30 limit does not apply to a special needs beneficiary).

The amount of scholarship money your child receives is deducted from the allowable expenses for the Coverdell. For example, if qualified expenses total $6,000 and your child receives a scholarship for $3,000, you can make a qualified withdrawal of $3,000. Remember that unused funds can always be rolled over into the Coverdell of a family member.

No, rollovers from a Traditional or Roth IRA into a Coverdell are not allowed.