Find out how a Coverdale Education Savings Account can help you save on taxes while you save for college. Get the scoop on the benefits, rules, and regulations of these special accounts.
According to the College Board's 2006 Trends in College Pricing report, average total costs are now $12,796 for four-year public colleges and universities, and $30,367 for private colleges and universities, with tuition and fees rising each year. If you're planning ahead for your own or your child's college education, costs can seem overwhelming. A Coverdale education savings account (ESA) can help bring peace of mind to your college saving.
What is a Coverdale Education Savings Account?
A Coverdale ESA is a trust or custodial account created to pay for the educational expenses of an individual, the "beneficiary." In general, the beneficiary has to be under age 18 when the account is established.
Money in a Coverdale ESA can help pay for educational expenses only at eligible schools. Virtually all accredited colleges, universities, and vocational schools are eligible, as well as some higher education institutions outside the U.S. Eligible schools also include elementary and high schools.
Save for College and Save on Taxes
With a regular account, you pay taxes on any interest your money earns. Money in a Coverdale ESA, however, grows tax free, as long as it is used to pay for the beneficiary's college expenses, like tuition or room and board. This tax advantage encourages many people to save for college in a Coverdale ESA. With the high cost of college, putting the money aside tax free can provide a considerable savings.
How Coverdale Can Cover your College Costs
The tax benefits of a Coverdale ESA only apply to money you spend on "qualified" education expenses, or expenses related to attending an eligible college, university, or vocational school. Any money you withdraw from a Coverdale ESA beyond the cost of these education expenses is taxed. Some expenses also must be required by the beneficiary's college in order to count as qualified education expenses, including:
• Tuition
• Fees
• Books, supplies, and other equipment
Room and board counts as a qualified expense even if your school does not require it, as long as you are enrolled at least half time (taking at least half of the full-time academic workload of your course of study).
If you're using a Coverdale ESA to pay for elementary or secondary school, qualified expenses can also include tutoring, uniforms, transportation, and computer technology equipment.
Who Can Contribute to a Coverdale Education Savings Account?
Anyone whose "modified adjusted gross income" is less than $110,000 (for people filing a joint tax return, the income limit is $220,000) can contribute to a Coverdale ESA, including the beneficiary. For most people, your modified adjusted gross income is the adjusted gross income on your federal income tax return. Organizations can also contribute to Coverdale ESAs without income requirements. All contributions must be made before the beneficiary of the ESA turns 18.
Navigating Contribution Limits
Annual contributions made to a Coverdale beneficiary are limited. In 2006, the limit was $2,000, which is the most anyone could contribute for a beneficiary in 2006, no matter how many Coverdale accounts that beneficiary had. The combined contributions from all sources and to all Coverdale ESAs cannot exceed the annual limit.
Example: When Annie was born in 2003, her parents set up a Coverdale ESA for her, and her
grandmother and uncle set up two more. In 2006, the total of all contributions to Annie's
three Coverdale ESAs could not exceed $2,000. If her parents contributed $2,000 to one of
the accounts, no one else could contribute to any of the three accounts during 2006. If
her uncle contributed $400 and her grandfather contributed $1,000, her parents (or anyone
else) could have contributed no more than $600 in the same year. The contributions could
have been put into any of Annie's Coverdale ESAs. Annie's older brother, Jacob, also has
a Coverdale ESA. If their parents contributed $2,000 to Annie's Coverdale ESA in 2006,
they could still have contributed $2,000 to Jacob's.
If you're saving for your own or your child's college education, a Coverdale ESA can save you a lot of money in taxes. Potential drawbacks are that people beyond a certain income cannot contribute, contributions cannot exceed a certain amount each year, and the money must be used only for qualified educational expenses. It's important to research your options and choose the plan that works best for you and your family. If you decide that a Coverdale ESA works for you, start putting tax-free money away now for your college expenses.