Coverdell Education Savings

The Coverdell Education Savings account is a non-deductible account that features tax-free withdrawals for a child's higher education expenses. Distributions for higher education expenses are both tax free and penalty free.

Contributions

There are certain eligibility considerations for the Coverdell Education Savings account:

• The child for whom you are contributing may not have had any contributions made on his or her behalf to a state prepaid tuition program in that year
• Contributions can be made on behalf of a child until the day before his or her 18th birthday
• The total aggregate contribution into one or more Education IRAs on behalf of a child is $2000 for a taxable year. As a contributor, your allowable contribution depends on your MAGI:

Saving for More Than One Child

Contributors may deposit their maximum allowable contribution into Coverdell Education Savings accounts for as many children as desired.

Taxes

Unlike a traditional IRA, you cannot take a tax deduction for any of the contributions that you make to a Coverdell Education Savings account. However, when the beneficiary is ready to take his or her withdrawal for school, there are no taxes due on any of the interest that your money has earned.

Distributions

Distributions must be made during the year in which the education expense occurred. If distributions exceed the educational expenses, the additional amount withdrawn is a non-qualified distribution.

When a non-qualified distribution is taken, a ratio of contributions and earnings is withdrawn. The earnings portion is then subject to taxes and a 10% penalty. Distributions made on account of death, disability, or scholarship are not subject to the 10% penalty. However, the earnings portion of such distributions is taxable.

Moving Funds to a Coverdell Education Account

You may roll funds over from one Coverdell Education Savings account into a second Coverdell Education Savings account established for the same child. You may roll the Coverdell Education Savings account into a Coverdell Education Savings account for a new designated beneficiary who is a member of the same family. That way, if a child decides not to pursue his or her education, the account can be transferred to a relative who does. You may not move the funds from a Traditional or Roth IRA to a Coverdell Education Savings account.