Coverdell Education Savings Account - Formerly Known as Education IRA's

Formerly known as the "education IRA," this type of college savings plan was greatly expanded with the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRAA). Contributions were increased to $2,000 per person per year. Accounts can be set up with most brokers or mutual fund companies.

Funds can be used for primary and secondary education expenses, with tax-free withdrawals for qualified education expenses (tuition, fees, tutoring, books, supplies, related equipment, room and board, uniforms, transportation, extended day programs, computers, Internet access, etc.) Any individual (including the beneficiary him/herself, relatives and non relatives) may contribute if they meet the earnings requirements.

Up to $2,000 per year in aggregate contributions may be made for the benefit of any child. The contributions may be placed in a single account, or in multiple accounts. Aggregate contributions for the benefit of a particular child in excess of $2,000 for a calendar year, no matter how many people are contributing, are treated as excess contributions and subject to punitive taxes. For tax payers earning $95,000 - $110,000 (single) or $190,000 - $220,000 (married filing jointly), contributions will be limited. If modified adjusted gross income for the taxable year is more than $110,000 (single) or $220,000 (married filing jointly), contributions are not allowed.

Amounts deposited in the account grow tax-free until distributed, and the child will not owe tax on any withdrawal from the account if the child's qualified higher education expenses at an eligible educational institution for the year equal or exceed the amounts of the withdrawal. If the child does not need the money for postsecondary education, the account balance can be rolled over to the Education IRA of certain family members who can use it for their higher education. Amounts withdrawn from an education IRA that exceed the child's qualified higher education expenses in a taxable year are generally subject to income tax and to an additional tax of 10%.

The deadline for contributions is April 15 of the year following the current tax year. Families who take advantage of these educational savings accounts will not automatically disqualified from also claiming the Hope or Lifetime college tuition credits, as long as the Cordell Savings Account withdrawals aren't used for the same expenses for which the Hope or Lifetime credit is claimed. This is a trust or custodial account that is created or organized in the United States exclusively for the purpose of paying the qualified higher education expenses of the designated beneficiary of the account. It is established for the benefit of any child under age 18. Contributions to the Education IRA will not be accepted after the designated beneficiary reaches his/her 18 th birthday and money must be used by age 30 or earnings are taxed as ordinary income plus a 10% penalty.