Coverdell Accounts
A Coverdell education savings account (Coverdell ESA) is a tax-advantaged education savings vehicle that lets you save money for college, as well as for elementary and secondary school (K-12) at public, private or religious schools.
Here's how it works:
Application process. You fill out an application at Hocking Valley Financial Solutions and name a beneficiary. The beneficiary must be under age 18 when the account is established unless he or she is a child with special needs.
Contribution rules. You (or someone else) make contributions to the account, subject to the maximum annual limits. Contributions can be made up until April 15 of the year following the tax year for which the contribution is being made.
Investing contributions. You invest your contributions as you wish (e.g., stocks, bonds, mutual funds, certificates of deposit) — you have sole control over your investments.
Tax treatment. Contributions to your account grow tax-deferred, which means you don't pay income taxes on the account's earnings (if any) each year. Money withdrawn to pay college or K-12 expenses (called a qualified withdrawal) is completely tax-free at the federal level (and typically at the state level, too). If the money isn't used for college or K-12 expenses (called a nonqualified withdrawal), the earnings portion of the withdrawal will be taxed at the beneficiary's tax rate and subject to a 10% federal penalty.
Rollovers and termination of account. Funds in a Coverdell ESA can be rolled over without penalty into another Coverdell ESA for a qualifying family member. Also, any funds remaining in a Coverdell ESA must be distributed to the beneficiary when he or she reaches age 30 (unless the beneficiary is a person with special needs).
Unfortunately, not everyone can open a Coverdell ESA — your ability to contribute depends on your income. And with an annual maximum contribution limit of $2,000, a Coverdell ESA probably can't go it alone in meeting today's college costs.
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