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College Savings
Today it takes a college degree to get the job you
could get with a high school diploma twenty-five years
ago. Do you have a child or grandchild or are you concerned
about helping another child pay for college? Anyone
can establish an account for a child and invest money
for that child’s education. These programs using
fixed insurance products can be used by persons at every
economic level.
Coverdell Education Savings Account
The old Educational IRA has gotten a bit of a makeover,
and now it's called the Coverdell Education.
New tax laws have made this plan much more attractive.
When saving for a child's post-secondary education,
you can now contribute up to $2,000 per year (per child)
until the child is age 18. This is significantly higher
than the old limit of only $500. Contributions are not
tax deductible. However, withdrawals from the account
are completely tax free, including earnings, when withdrawn
to pay for qualified education expenses. (Remember that
this is somewhat similar to a Roth IRA: after-tax going
in, tax-free coming out!)
Who Can Contribute and How Much?
Anyone can contribute to a Coverdell Education Savings
Account as long as their income does not exceed certain
limits (see below). Keep in mind, however, that the
$2,000 per year limit is PER CHILD, regardless of the
number of contributors or donors. For example, if a
grandparent contributes $1,200 for a child, the parent
could not contribute more than $800 for the same child.
The Coverdell Education Savings Accounts will have a
"manager" (often the parent) who will need
to monitor contributions for the beneficiary (child)
to help insure there are no excess contributions. Like
Traditional IRA's, excess contributions over $2,000
are subject to a 6% federal tax penalty.
Income Limits
A donor may be limited as to the amount of their contribution
if their modified adjusted gross income exceeds $95,000
for single filers, or $190,000 for joint filers. Contribution
amounts are gradually phased out between the incomes
of $95,000 and $110,000 for single filers and $190,000
and $220,000 for joint filers. Persons with income amounts
above $110,000 (single) and $220,000 (joint) would not
be able to contribute to a Coverdell Education Savings
Account.
How Long Can Benefits Stay In the Account? The funds
can remain in the account until the beneficiary turns
age 30. Any remaining funds could be rolled over to
an another qualified family member (see next section).
Any funds left and not rolled over by age 30 would be
taxable to the beneficiary. In addition, because the
funds were not used for educational purposes, there
would also be a 10% penalty.
Rollovers
Rollovers can be made from an existing Coverdell Education
Savings Account to a new Coverdell Account if the new
beneficiary is a member of the original beneficiary's
family. Family members would include: Grandparents,
Parents, and Spouses, Brother and Sisters, Children
and their Spouses, Stepchildren and their Spouses. This
could be particularly helpful if a family had several
children. Example:The oldest child in a family had a
Coverdell Education Savings Account and decided not
to attend college. Their account could be rolled to
his brother or sister as long as it was done prior to
the oldest reaching age 30.
Suppose a beneficiary does not use all the money in
his account and has children prior to reaching age 30.
Remaining funds could be rolled to that original beneficiary's
child(ren) prior to the beneficiary reaching age 30.
One could also rollover an existing Coverdell Education
Savings Account to another existing Coverdell account
for the same child.
Neither American National nor its agents provide
legal or tax advice. Please consult your attorney or
tax advisor for your specific situation.
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