Tax planning and compliance for investors
Free Online Guides
An overview of Coverdell education savings accounts.
Coverdell accounts are similar to Roth IRAs in many respects, with the main difference being the intended use of the account (education expenses rather than retirement). In the typical situation, you set up a Coverdell account for your child under 18 years of age with a bank, mutual fund company or stockbroker and contribute up to $2,000 per year. You can't deduct your contributions, but you receive other benefits:
Qualified expenses include some items that would not qualify for purposes of a 529 account. You can use a Coverdell account for primary and secondary education, or to buy a computer for the use of a student.
If the amount you take out is more than the qualified education expenses, the part of the withdrawal that represents earnings is taxable, and also subject to a 10% penalty tax. If money remains in the account when the child reaches age 30, it has to be distributed within 30 days.
There are many variations on this theme. As you'll see when we get into the details below:
The federal formula for student financial aid treats a Coverdell account as an asset of the parent. That's fortunate because it means the assets in this account will reduce aid less than if the student were treated as the owner. A parent is expected to contribute less than 6% of the parent's assets towards a child's education, and in some cases the contribution is zero because of various exclusions. A student is expected to contribute 20% of the student's assets toward his or her own education. As a result, for purposes of obtaining student financial aid, a Coverdell account is on a par with a 529 account or a regular investment account held by a parent and receives more favorable treatment than a custodial account under the Uniform Transfers to Minors Act.
|That Thing Rich People Do|
|The fastest, easiest way to learn the principles of investing.|
|Our complete guide to Roth IRAs and Roth accounts in 401k and similar plans: choosing, creating, building and using these accounts.|
|Consider Your Options|
|A plain-language guide for people who receive stock options or other forms of equity compensation.|
|Equity Compensation Strategies|
|A text for financial advisors and other professionals who offer advice on how to handle equity compensation including stock options.|
|Capital Gains, Minimal Taxes|
|Tax rules and strategies for people who buy, own and sell stocks, mutual funds and stock options.|