Special Needs Beneficiary of a Coverdell Account

Rules for a Coverdell education savings account are relaxed somewhat for beneficiaries with special needs.

The 2001 tax law calls on the Treasury to issue regulations permitting extended use of Coverdell accounts for a special needs beneficiary. The Conference Committee Report for that law says the definition should include “an individual who because of a physical, mental, or emotional condition (including learning disability) requires additional time to complete his or her education.” Unfortunately, as of this writing (early 2005) the Treasury has not issued regulations on this subject, and it isn’t clear that these provisions can be used until regulations are adopted.

Relaxed Rules

When the Treasury issues regulations, the following relaxed rules will apply to a Coverdell account established for a special needs beneficiary:

  • Contributions will be permitted even after the beneficiary turns 18.
  • The Coverdell account can continue in existence (without transfer to another beneficiary) after the beneficiary turns 30.
  • An account established for a different beneficiary can be transferred to a special needs beneficiary who is over 30.

Expenses for Special Needs Services

In addition, the definition of qualified education expenses is somewhat broader for a special needs beneficiary. It includes expenses for special needs services incurred in connection with school enrollment or attendance. We would expect, for example, the cost of hiring a reader for a blind student to fall within this definition.

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