The Coverdell Education Savings Account was created by the Taxpayer Relief Act of 1997 as a college savings plan to receive nondeductible contributions solely for future education expenses of a child “beneficiary.”
A Coverdell Education Savings account can be used as a college savings plan for any beneficiary who is under age 18 or is a special needs beneficiary.
Any individual (including the beneficiary) whose modified gross income for the year is less than $110,000 ($220,000 in the case of a joint return) qualifies for a Coverdell Education Savings Account.
The document creating and governing the Coverdell Education Savings Account must be in writing and satisfy the following requirements:
- Trustee or custodian must be a bank or an entity approved by the IRS.
- The document must provide that the trustee/custodian can only accept a contribution that meets all of the following conditions:
- Is in cash
- Is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary.
- Would not result in total contributions for the year (not including rollover contributions) being more than $2,000.
- Money in the Coverdell Education Savings account cannot be invested in life insurance contracts.
- Money in the account cannot be combined with other property except in a common fund or common investment fund.
- The balance in the account generally must be distributed within 30 days after the earlier of the following events:
- The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.
- The beneficiary’s death.
- $2,000 per year, restricted by gift tax regulations.
- Single Filer: To contribute the full $2,000, the modified adjusted gross income (MAGI) must be less than $95,000. (Starts phasing out at $95,000, but less than $110,000.)
- Married Joint-filer: To contribute the full $2,000, the MAGI must be less than $190,000. (Starts phasing out at $190,000, but less than $220,000.)
A new beneficiary may be named as long as he/she is a member of the family of the current beneficiary. The beneficiary may be changed without income tax consequences if the new beneficiary is a member of the former beneficiary’s family. If the new beneficiary is in the same or higher generational level than the former beneficiary, the beneficiary may be changed without gift tax consequences.
For 2002-2012, elementary, secondary and higher educational expenses including: tuition, fees, supplies and equipment, and room and board.
Tax and penalty free if used for qualified expenses.
A Coverdell Education Savings Account is available through Northwestern Mutual Investment Services, LLC.
All securities are offered through Northwestern Mutual Investment Services LLC, (NMIS), Suite 300, 611 E. Wisconsin Avenue, Milwaukee, WI 53202, 1-866-664-7737. Member FINRA and SIPC. NMIS is wholly owned by Northwestern Mutual.