529 College Savings Plans

So You Want To Open A Coverdell Education Savings Account

A Coverdell Education Savings Account (ESA) would be an account that has been created as an incentive to encourage parents and students to save for their educational expenses.

You'll find that the IRS has documents that help you in this regard, such as TAX TIP 2008-59 at irs.gov/newsroom/article/0,,id=107636,00.html

Here, you'll find that the total contributions for any Coverdell Education Savings Account's beneficiary can't go more than to two thousand dollars in any one year. And it doesn't matter if you take out three accounts, that'll still be your limit. They define a beneficiary as being someone who's under 18 years or age, or that they're a special needs beneficiary.

You'll find that Coverdell ESA Contributions aren't tax deductible, but if you deposit amount into the account, they'll be tax-free until the money is used. The beneficiary won't owe any tax on distributions as long as they're less than the beneficiary's qualified education expenses at the school they're going to. Any qualified elementary and secondary education expenses will be applicable.

If distributions from a Coverdell Education Savings Account are for enrolling or attending an eligible educational institution, there won't be any tax. This is true if it's a public, private or religious school that provides elementary or secondary education as determined under that particular state's laws.

Distributions from Coverdell Education Savings Account 529 college plans are tax-free, as long as they're being used for any qualified education expenses, which would include tuition and fees or required books. Other things that are covered are supplies and equipment and room and board.

Other eligible institutions that are covered under a Coverdell Education Savings Account 529 college fund would include any college, university, vocational school or other postsecondary educational institution that would be eligible to participate in any student aid program that's administered by the Department of Education. Almost every accredited public, nonprofit, and proprietary (a privately-owned profit-making school) or postsecondary institution would be eligible.

If the distribution from one of these 529 college plans goes higher than the qualified educational expenses that they allow you, a portion of the distribution will be taxed to the beneficiary with an additional 10% tax.  Exceptions to this 10% tax include if the beneficiary dies or becomes disabled or if the beneficiary receives a qualifying scholarship.

The thing they call, 'Hope and lifetime learning credits' can be claimed in the same year the beneficiary takes a tax-free distribution from Coverdell Education Savings Account college saving plans, although these same expenses must not be used for both benefits.

Depending upon the contributor's Modified Adjusted Gross Income, there will be contribution limits for taxpayers.  Contributions to a Coverdell Education Savings Account, without any extensions, may be made until the date that the contributor's return is due.

Any Coverdell Education Savings Account balance that's left when the beneficiary has reached the age of thirty must be distributed within thirty days. At that point, any portion that represents account earnings will be taxable and will be subject to that additional 10% tax. If you roll the full balance to another Coverdell ESA for another family member, you may avoid these taxes. For more details you can read the IRS Publication 970 in the PDF document at irs.gov/pub/irs-pdf/p970.pdf

Also check out their 'Tax Benefits for Higher Education' at IRS.gov or call 800-TAX-FORM (800-829-3676).  

Remember that for the genuine IRS Web site be sure to use irs.gov
Internet sites ending with .com, .net, .org or other designations instead of .gov are NOT official. They're all trying to pretend to be the government so they can get your money. The government always distributes its documents free-of-charge.
  
Also look at Tax Topic 310, which is about Coverdell Education Savings Accounts at irs.gov/taxtopics/tc310.html and check out the IRS Tax Tip 2007-48 which is about offsetting Education Costs at irs.gov/newsroom/article/0,,id=107670,00.html

Here is a 529 State Tax Calculators around the internet that allow you to figure your investments. One such calculator can be found at schwab.com/public/schwab/planning/college_planning/529_basics/529_calculator?cmsid=P-2902608&lvl1=planning&lvl2=college_planning

This will allow you to find out if you receive a tax benefit for contributing to your state's 529 plan. All you have to do is answer five simple questions which will allow you to see whether your state offers a tax benefit and, if so, how much the benefit might be. Remember that you can open your 529 plan from any state and it doesn't matter which state that you live in; so you might find that you're better off using another state's plan when you're considering in additional factors.

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