Paying for College
A Coverdell account can be used only to pay qualified primary, secondary and postsecondary education expenses for the beneficiary. Qualified expenses include tuition, fees, tutoring, books, supplies, room and board, uniforms, transportation and computers. Rules covering Coverdell accounts include:
- The maximum contribution for a beneficiary from all sources is $2,000 per year. Contributions must be in cash, not in stocks, bonds or other forms.
- Contributions can be made to both Coverdell and 529 accounts, but there are tax implications if someone contributes more than $13,000 per year to a single beneficiary.
- Beneficiaries or the beneficiaries’ parents may be listed as the account owners. The account is considered an asset of the owner. If the owner is a student, this will have a large impact on financial aid eligibility. It will have a lower impact if the parents are the owners.
- Contributions may be made until the beneficiary turns 18 years old. There are no age limits for special needs beneficiaries.
- An account must be used by the time the beneficiary is 30. If not, the earnings are taxed as ordinary income, plus a 10 percent penalty.
- Contributions are not tax deductible.
- Withdrawals for qualified education expenses are exempt from federal income tax. Withdrawals are also tax free if the beneficiary dies or becomes disabled.
- Withdrawals for other reasons are taxed as ordinary income, with a 10 percent penalty.
- An account can be rolled over to another Coverdell account set up for a family member of the previous beneficiary.
Coverdell accounts can be set up through brokers, mutual funds or banks. As with any other investment, research fees, commissions and other features before choosing where to set up an account.