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Money Girl
109 MG Tell Tell, What's a Coverdell?
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I'm your host, Laura Adams. This episode is about a great way to save for a child's education using CoverDell Education Savings Accounts. And last week's show I discussed the advantages of using 529 plans to save for higher education. Today's topic is about another tax-advantaged account that can be used to save for any level of education from kindergarten through graduate school. It's called a CoverDell Savings Account. CoverDell's also differ from 529 plans because they're not as flexible. They place limitations on who can contribute, how much can be contributed each year and the age of the student who will use the funds. When you open a CoverDell the account must be for a designated beneficiary who's under the age of 18. After the student's 18th birthday, no more contributions can be made unless the account is for a special needs beneficiary. The funds must generally be used by the time the student reaches age 30 in order to avoid taxes and penalties. With CoverDell's N529 plans, your contributions and earnings always grow tax-free, as long as distributions are used to pay for qualified expenses at eligible schools. CoverDell funds can be used to pay for the student's tuition and all associated fees, books, equipment and supplies for their attendance at an eligible institution. This could be any post-secondary schools such as a university or college that's eligible to participate in federal student aid. CoverDell funds can also be used for reasonable room and board for those who are considered at least half-time students. The unique feature of CoverDell's is that they can also be used to pay for the expenses of younger students. This includes children in kindergarten through grade 12 who attend any eligible public, private or religious school. There are more qualified expenses for younger students than for those getting post-secondary education. These include tuition, fees, books, supplies, computer equipment, Internet access, academic tutoring, uniforms, transportation and room and board. Any school you're interested in can tell you if they're eligible to accept CoverDell funds. You can contribute to a CoverDell savings account only if your adjusted gross income is less than $110,000 or less than $220,000 if you file a joint tax return. Companies and trusts are even allowed to make contributions to CoverDell's, no matter how much income they earn. There's an annual contribution limit of $2,000 per student. This limit applies even if more than one CoverDell account has been opened or more than one person makes contributions for the same beneficiary. Consider this scenario. After a lucky child is born, her parents decide to set up a CoverDell for her and her grandparents also decide to set one up. This is fine as long as the total contributions for the child to all her CoverDell accounts don't exceed $2,000 per year. If the parents were to contribute $500 and the grandparents $1,500, together they have maxed out the allowable yearly limit for the child. Since 2012, City has been a proud partner of Global Citizen Festival using the power of music to inspire people to help end extreme poverty. Tune in on YouTube September 28 to get inspired, experienced performances from top artists and find out how you can join us in taking action. Together we can make an impact for the love of making a difference, for the love of progress. City, visit globalcitizen.org/city to learn more. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel. Planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but policy genius makes the process a breeze. 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That means you earn on what you want, like trying out that new workout class and 2% cash rewards on what you need, like a foam roller for your sore muscles. That's the beauty of the Active Cash Credit Card. It's ready when you are, with unlimited 2% cash rewards. The Wells Fargo Active Cash Credit Card. That's real life ready. Terms apply. Learn more at wellsfargo.com/activecash. If you want to save more than $2,000 a year for a child's education, you can also open and contribute to a 529 plan for them in the same year. The deadline for making Coverdell contributions is the due date for filing your tax return for the prior year. So if you want to contribute to a Coverdell for the 2008 tax year, you have until April 15th of 2009 to do it. Here's a tip if you earn too much to contribute to a Coverdell. Simply gift the money to the student and help them open up the account for themselves. This assumes you don't have the next Bill Gates on your hands already earning over the allowable limit before his or her 18th birthday. What if you can't use all the Coverdell funds for the beneficiary's qualified expenses? Maybe the student graduates with all her education bills paid, but there's still $1,000 left in the account. If the leftover money is withdrawn, this will generally be considered a taxable distribution, also subject to an additional 10% tax penalty. Here's a tip for dealing with excess Coverdell funds. Instead of closing the account and taking a taxable distribution, change the designated beneficiary to a member of the student's family who's a potential student. This can include siblings, step relatives, and cousins of the student, for example. See IRS Publication 970 for complete details on Coverdell accounts and a list of qualified family members for making a beneficiary change. Coverdell's can be open with traditional or online brokerages, as well as with many banks and mutual fund companies. I'll include a link in the show notes at moneygirl.quickendirtytips.com to some low-cost Coverdell providers. Coverdell's are great if you're saving for a younger child's elementary or high school education, but when you're saving only for college expenses, consider the advantages of the 529 plan. As I discussed in last week's show, 529 plans have no limit for annual contributions and offer more flexibility than Coverdell's when saving for higher education. I'm glad you're listening. If you have a question or comment, email can be sent to money@quickendirtytips.com. The voicemail line is 1-877-6-Ritcher. If you forget the moneygirl contact information, you can find it, as well as show transcripts at quickanddirtytips.com. Cha-ching! That's all for now. Courtesy of Moneygirl, your guide to a richer life. Get moneygirl and other great shows from quick and dirty tips streamed to your iPhone. Download Stitcher free today at Stitcher.com. With the Wells Fargo Active Cash Credit Card, you can earn unlimited 2% cash rewards on purchases you want and purchases you need. That means you earn on what you want, like trying out that new workout class and 2% cash rewards on what you need, like a foam roller for your sore muscles. That's the beauty of the Active Cash Credit Card. It's ready when you are, with unlimited 2% cash rewards. The Wells Fargo Active Cash Credit Card, that's real life ready. Terms apply. Learn more at wellsfargo.com/activecash. Earning your degree online doesn't mean you have to go about it alone. At Capella University, we're here to support you when you're ready. From enrollment counselors who get to know you and your goals, to academic coaches who can help you form a plan to stay on track, we care about your success, and are dedicated to helping you pursue your goals. 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