Parents and other interested persons may be able to establish a Coverdell ESA for a child under the age of 18. Contributions to the account will not be tax deductible, but the earnings will be tax-free if used for qualified higher education expenses.
You are eligible to contribute to a Coverdell ESA if you and your spouse file a joint tax return and have a joint Modified Adjusted Gross Income (MAGI) of $190,000.00 or less, or, if you file an individual return and your MAGI is $95,000.00 or less. Those with higher incomes may qualify for reduced contributions. You aren’t eligible to contribute if you make a contribution to a qualified state tuition program during the year.
Contributions cannot exceed $2,000.00 per child per year. If parents, grandparents, and others have each set up an account for the same child, their combined contributions cannot exceed $2,000.00 per child per year. Careful tracking is important to avoid possible penalties. Withdrawals from a Coverdell ESA are tax and penalty free, provided that the child’s qualified higher education expenses equal the withdrawals from the Coverdell ESA for that year. Otherwise, any withdrawal of earnings from the account is taxable and a 10% penalty tax may apply.
A Coverdell ESA can be a great savings vehicle even if you’re not sure whether your child will attend college or vocational school. The funds can be transferred from one child’s Coverdell ESA to another child’s if that child is a member of the same family.
An IRA tax deduction for any given year may be taken for contributions made to your IRA from the beginning of that year through the due date for the income tax returns, usually April 15, of the following year.