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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 However, withdrawals from the account are completely tax free, including earnings, when withdrawn to pay for qualified education expenses.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.