You're probably familiar with 529 college savings plans. Named for Section 529 of the Internal Revenue Code, they're also known as qualified tuition programs, and they offer tax benefits when you save for college expenses.
But are you aware of a lesser-known cousin, established under Section 530 of the code? It's called a Coverdell Education Savings Account and it's been available since 1998.
The general idea of Coverdell accounts is similar to 529 plans – to provide tax incentives to encourage you to set money aside for education. However, one big difference between the two is this: Amounts you contribute to a Coverdell can be used to pay for educational costs from kindergarten through college.
Generally, you can establish a Coverdell for a child under the age of 18 – yours or someone else's. Once the Coverdell is set up, you can make contributions of as much as $2,000 each year. That contribution limit begins to phase out when your income reaches $190,000 for joint filers and $95,000 for single filers.
Anyone, including trusts and corporations, can contribute to the account until the child turns 18. There are no age restrictions when the Coverdell is established for someone with special needs.
While your contribution is not tax-deductible, earnings within the account are tax-free as long as you use them for educational expenses or qualify for an exception. In addition, you can make a tax-free transfer of the account balance to another eligible beneficiary.
Qualified distributions from a Coverdell are tax-free when you use the money to pay for costs such as tuition, room and board, books, and computers.
Please call for information about other rules that apply to Coverdell accounts. We'll be happy to help you decide whether establishing one makes sense for you.