Below is a guest post by Marsha Woelber, a Partner at Independent Investment Services, LLC/Securities Offered through LPL Financial, Member FINRA/SIPC.
Marsha does occasional posts on SouthernMamas about becoming financially savvy. To read her previous posts, click here.
What is a Coverdell ESA?
Coverdell Education Savings Accounts (ESA) came about in 2001 to give parents more options for their children’s education. Similar to an IRA, a Coverdell ESA allows individuals to set aside up to $2,000 per year (2010) tax-deferred in an account earmarked for education. As long as you are using the money for qualified expenses, withdrawals are tax-free.
The big benefit of using a Coverdell ESA is that you can use the money in the account for elementary and secondary education expenses (including private school tuition). This is unlike a 529 plan, where the funds must be for higher education.
Many Savannah parents utilize both types of plans to enjoy the tax treatment for K-12 expenses (Coverdell), and the higher contribution limits of a 529 plan.
What is changing in 2011? Unless Congress extends current limits, maximum annual contributions into a Coverdell will fall to only $500 (from $2000) after 2010. More bad news: K-12 expenses will no longer qualify. Any amounts accumulated at the higher contribution limit can remain in the accounts, but you will have to pay tax on the investment gains in any amounts you withdraw for K – 12 expenses after Dec. 31, 2010.
What should I do with my Coverdell ESA(s)? If you can’t spend the money in your Coverdell prior to Jan. 1, 2011, it is probably best to roll it into a 529 plan. Technically, you must take the money out of the Coverdell and put an equal or larger amount into a 529 plan in the same year.
A 529 does not provide any tax advantages for K-12 expenses, but it does allow tax-deferred savings for college. For more information on 529 plans, please see my previous SouthernMamas article by clicking here. Be sure to contact a tax or financial advisor to help you move your funds from a Coverdell to a 529 plan to potentially avoid any negative tax consequences.
Marsha Woelber is a Partner at Independent Investment Services, LLC/Securities Offered through LPL Financial, Member FINRA/SIPC. She can be reached @ email@example.com or 912-650-2852. The opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please talk to your tax advisor before executing any strategy.