|
Answer:
Dear
Roxanne,
Yes.
The child's grandparents can contribute...any number
of people can, in fact, contribute, but the maximum
that can be socked away is $2,000 per beneficiary.
And the account is now called a Coverdell Education
Savings Account (CESA). So let's review the basics
and bring you up to date.
The
New CESA
Once
known as the Education IRA, the Coverdell has had
a significant makeover. Not only has the name changed,
but so has the amount you can contribute. In the past
you could only put in $500 a year, but now can save
$2,000 per year per beneficiary. That means if you
have two children and you open two individual accounts,
you could save a total of $4,000.
Contributions
can be made by family and friends -- just as long
as the total amount in an account does not go over
the annual $2,000 cap.
If
you save $2,000 starting when your child is born,
and it earns 5%, you'll have over $54,000 when he
or she graduates from high school.
The
money can be used -- free of federal taxes -- to pay
for qualified elementary, secondary or college expenses.
The
Details
- Contributions
are not tax deductible but the account grows tax-free.
- The
child (a.k.a. the beneficiary) must be under age
18.
- Qualified
expenses include tuition, books, fees, supplies,
computers and educational software.
- The
account must be fully used by the time the beneficiary
reaches age 30 or it will be hit with taxes and
penalties. An exception: a child with special needs.
- If
the beneficiary does not use the account, it can
be transferred to a sibling. One rollover may be
made per year.
- There
are some income restrictions. To make the full $2,000,
your annual adjusted gross income must be $190,000
or below for married couples filing jointly or for
singles, $95,000 or below. The contribution amount
is phased out between $95,000 and $110,000 for single
filers. For married couples, phase out begins at
$190,000 and ends at $220,000.
- If
your income is too high, you can gift the money
to your child and then open the account. Or, ask
someone within the income amounts to contribute.
- The
account is regarded as the student's asset, which
can reduce eligibility for federal financial aid.
What
If?
If
you sense at some point that your child is not going
to college, use the money to pay for educational expenses
while he or she is in elementary or high school.
Or,
transfer the money to a brother or sister under age
30.
If
the money is not used by the time the child reaches
30 and it has not been transferred to a sibling, it
becomes that child's property.
Managing
the Account
You
can open a Coverdell Account here at BUYandHOLD. Click
HERE for details.
Once
you do, keep careful track of how much you, the child's
grandparents or anyone else contributes to the account.
If it is over $2,000 in any given year, there will
be a 6% tax on the excess.
At
the end of each year, you will receive Form 5498 detailing
the total amount in the account via e-mail from BUYandHOLD.
Two
Words of Caution
(1)
If you plan on applying for financial aid, you'll
want to minimize the amount of assets held in your
child's name. Many (but not all) financial aid formulas
require you, as the parent, to contribute 5.6% of
your assets per year (while your child is in college)
for tuition but your child is required to fork over
a whopping 35% of his or her assets.
(2)
Earnings are not guaranteed -- the account, just
like an IRA, is subject to fluctuations in the stock
market and interest rates.
For
More Info
www.SavingForCollege.com
|
