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Coverdell Education Savings Account
A Coverdell Education Savings Account, formally known as
an Education IRA, is an education savings plan
set up and managed by a parent or guardian for the benefit of a minor. Amounts
deposited in the account grow tax-free until distributed, and the child will not
owe tax on any withdrawal for qualified primary, secondary and/or higher
education expenses.
The CESA is controlled by you for the benefit of the child. When the child
reaches age 18 you may continue to manage the account or transfer that power to
the child. Contributions to the Coverdell Education Savings Account are currently capped
at $2,000 per year.
| Coverdell
Education Savings Account |
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| Minimum to Open: |
$250 |
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| Contribution Deadline: |
April
15th of this year for previous tax year. |
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| Tax
Advantages |
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| Contributions: |
Non-Deductible and
subject to restrictions. |
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| Earnings: |
Potentially
Tax-Free. |
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| Withdrawals: |
Potentially
Tax-Free, if withdrawn for
qualified educational expenses before the child is age 30. |
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| Contributions |
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| Who
is Eligible: |
| - Designated
beneficiary must be a minor when the account is opened. |
| - Eligibility
phase out begins at modified AGI of $95,000 for contributors who
are single taxpayers and modified AGI of $190,000 for married
taxpayers. |
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| Annual
Contribution Amounts: |
| - Maximum:
$2,000 per year until the child's 18th birthday (subject to
restrictions). |
| - Contributions may be made to these accounts for the
same beneficiary in the same year. |
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| Withdrawals |
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| Penalty-Free: |
Withdrawal
of earnings for qualified educational expenses before the child
reaches age 30. |
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| Penalty: |
| - Withdrawal
of earnings for non-qualified educational expenses may be
subject to a 10% penalty, and will be considered taxable income. |
| - Excess
contributions (contributions over the legal maximum $2,000 per
year) are subject to a 6% additional tax, for each year that the
excess remains in the account. |
| - If
there are any unused funds in the account when the beneficiary
reaches age 30, they must be distributed to him or her as a
taxable withdrawal. However, rolling these funds over to a
qualified family member of the designated beneficiary can
preserve their tax-free status. |
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| Exceptions to
Penalty: |
Death
or disability of beneficiary and other conditions. |
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