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Overview
A Coverdell ESA (Education Savings Account) was created by Congress to provide people a way to save for a child's education, tax-free, whether it be for K-12, college, graduate school, or any other formal education that children may pursue. It was named for the late Sen. Paul Coverdell of Georgia, for years the champion of such legislation.
Significance
While parents will find this to be a helpful, less painful way to save for a child's education, the tax deduction applies to anyone who makes a contribution to a Coverdell ESA. Therefore, if you are a grandparent who is interested in setting aside funds for a grandchild's education, a tax deduction is available to you, too.
Time Frame
An Education Savings Account must be set up for the benefit of a child who is under 18 years of age. The only exception to this rule is if the child has special needs. If you believe the child for whom you are interested in establishing an account falls into that category, check with a professional before making such a deductible payment.
Size
You may make a contribution of up to $2,000 annually for the benefit of any number of children, but the tax-deductibility of contributions to an ESA may be limited by your income. For example, your contribution will be deductible if your adjusted gross income for tax purposes is under $95,000 for a single filer, or $190,000 to $220,000 if you file jointly as a married couple. The maximum contribution you make for each child will be reduced gradually for tax purposes if your adjusted gross income is more.
Benefits
Each child can use the funds in her ESA for any qualified educational expense, tax-free. However, when she becomes 30 years old, except if she has special needs, if there are funds remaining in her ESA, they can be transferred to the account of another qualified family member, tax-free, as long as that person is under 30 years of age.
Considerations
You must make your contribution to an ESA between Jan. 1 and your tax filing deadline in the year following that for which you are claiming a deduction. You can also invest your contributions in mutual funds, an attractive option for those accounts whose funds will not be used for several years.
