Saving For College: Coverdell Education Savings Account (Education IRA)

Most articles on IRAs focus on the retirement variety, which makes sense.  After all, IRA is short for Individual Retirement Account.  However, there is such thing as an education IRA, better known as a Coverdell Education Savings Account.

Education IRAs can be opened for individuals under the age of 18 and used to pay any qualified education expense tax-free, provided the amount of the distribution is less than or equal to the beneficiary’s qualified education expenses for the year. For example, if you were to incur qualified education expenses of $5,000 in 2009 and withdrew $4,000 from your education IRA to help pay for it, the $4,000 distribution would be completely tax-free.  However, if you were to withdraw more $6,000, the excess distributions over the amount of $4,000 would be taxable as income.

Coverdell Education Savings Account FAQ

• $2,000 yearly contribution limits
• Any individual earning less than $110,000 for single filers and $220,000 for those filing jointly are eligible to contribute to an education IRA provided total contributions by all individuals totals no more than $2,000 per beneficiary per year
• Contributions are not tax deductible
• Earnings grow tax-deferred
• Distributions are tax-free so long as the amount distributed is less than the beneficiary’s total yearly qualified education expense
• Accounts may be opened/contributed to on behalf of individuals under the age of 18
• All assets must be distributed within 30 days of the beneficiary turning 30 years of age, even if they are still in school or didn’t attend college
• For more on education IRAs, see IRS publication 970

Qualified Education Expenses

Only certain qualified educational expenses are eligible to receive tax-free deductions from a Coverdell Education Savings Account.

• Tuition and fees
• Books, supplies, and equipment (such as a computer)
• Tutoring
• Special needs services for a special needs beneficiary

The following expenses are eligible if and only if required by the educational institution attended by the beneficiary.

• Room and board
• Uniforms
• Transportation
• Supplementary items and services