Overview of Coverdell Education Accountants These accounts, originally referred to as Education IRAs, have been available for over 15 years. These accounts are nondeductible education savings accounts. The investment earnings from a Coverdell account accrue and are withdrawn tax-free, provided the proceeds are used to pay qualified education expenses of the account beneficiary. Annual ContributionsThe allowable nondeductible contribution is $2,000 per year per beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18. ContributionsContributions that CANNOT be made: Those that aren’t made in cash; Those that are made after the accountholder reaches age 18 (special needs students discussed later), or Those that exceed the annual contribution limit (except for rollovers). Timing of the ContributionsContributions to these accounts must be made by April 15 of the subsequent tax year. If April 15 falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day. Projecting the Account GrowthThe table below allows you to predict the growth of an account over various periods and at selected investment rates. Example of how to use the table: Assume contributions of $1,500 are made each year for 14 years to the account and the account is earning 4%. From the table, the growth factor for 14 years at 4% is 18.292. To determine the value of the account at the end of the 14-year period, multiply the factor times the annual contribution of $1,500. In this example, the account value would be $27,438. Who Can Make Contributions?Contributions to Coverdell Education Savings Accounts can be made by any individual, including the beneficiary, if the “modified adjusted gross income (AGI)” of the contributor is less than the statutory phase out limit. Corporations and other entities (including tax-exempt organizations) are permitted to make contributions to these accounts, regardless of the amount of the income of the corporation or entity during the year of the contribution. No contributions are allowed once the Coverdell account beneficiary reaches age 18. Phase-Out Limits The annual contribution per beneficiary is available in full only to an individual contributor with a modified AGI below the phase-out limits. “Modified AGI” is figured by adding back to regular AGI any income the contributor excluded under the foreign provisions (e.g., foreign earned income or income from U.S. possessions). The contribution limit is phased out ratably for contributors with modified AGIs between the lower and top modified AGI levels. If you think you will be limited in making contributions because of your AGI level, one option might be gifting the funds for the contribution to either the beneficiary or someone else whose modified AGI is low enough to allow the contribution on behalf of the beneficiary. A 6% excise tax applies to excess contributions - i.e., any contribution over the annual limit. Contributions may be made to both a Coverdell Savings Account and a Qualified Tuition Plan for the same beneficiary without penalty. The excise tax also isn’t charged if: The contribution is withdrawn before the due date (including extensions) of the contributor’s income tax return; or The contribution is a rollover. Qualified Education ExpensesIf a beneficiary’s “qualified education expenses” in a year equal or exceed total Coverdell account distributions for the year, the distributions are 100% excluded from the beneficiary’s gross income. “Qualified education expenses” are limited to expenses for school or higher education and generally include tuition, fees, books, supplies, equipment and certain room and board expenses. The term “school” for this definition includes any school that provides elementary or secondary education (kindergarten through 12th grade, as determined under state law). “Qualified elementary and secondary education expenses” are defined as follows: (a) Expenses for tuition, fees, academic tutoring, special needs services in the case of a “special needs beneficiary,” books, supplies, and other equipment, which are incurred in connection with the enrollment or attendance of the designated beneficiary of a Coverdell account as an elementary or secondary school student at a public, private, or religious school. (b) Expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs), which are required or provided by a public, private, or religious school in connection with the enrollment or attendance of the designated beneficiary at the school. (c) Expenses for the purchase of any computer technology or equipment or for Internet access and related services if the technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years that the beneficiary is in school. This will not include expenses for computer software designed for sports, games, or hobbies unless the software is educational in nature.