A Coverdell Education Savings Account, also referred to as an Education IRA, is an account that is set up to pay qualified education expenses of a designated beneficiary. It can be opened at any bank or other IRS-approved entity that offers Coverdell ESAs. All brokerage firms where you can establish accounts offer them. It's easy to go online at firms like TD Ameritrade, Charles Schwab, or Fidelity to start the application process.
Coverdells are accounts to help pay a student's qualified educational expenses. Contributions are allowed for individuals under the age of 18. Contributions are not tax-deductible, but qualified distributions are not taxable at the state or federal level.
To make the full allowable contribution, your 2016 modified adjusted gross income must be $190,000 or less for couples filing jointly and $95,000 or less for singles.
To make a partial contribution, your 2016 modified adjusted gross income must be between $190,000 and $220,000 for couples filing jointly and between $95,000 and $110,000 for singles. The maximum allowed contribution is $2,000 per year, per designated beneficiary. Like 529 accounts, when used for qualified college expenses, distributions are tax free, however unlike 529's, certain K-12 purchases are also considered qualified when using a Coverdell ESA.
When you open an account, as the responsible individual, you get to direct the investments however you wish dependent on the availability of different investment products where your account is held. You can invest in stocks, bonds, mutual funds, ETF's etc. The one major caveat to a Coverdell is that the assets all must be distributed by the time the beneficiary reaches 30 years of age or the earnings will be subject to a 10% penalty. That's different than a 529 where there is no end date. Beneficiaries can be changed on a Coverdell, so if your child decides not to go to college, you can transfer the funds to another child or family member.
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