| NEW YORK
NEW YORK Feb 13 Coverdell education savings
accounts have never really drawn many headlines, even when
unexpectedly saved from extinction as part of Washington's
"fiscal cliff" deal.
Much like the 529 college savings programs that are familiar
to many people, Coverdell ESAs are accounts where earnings grow
tax-free, as long as withdrawals are used for qualified
education expenses such as books, supplies or transportation.
Some key differences have always kept Coverdells out of the
limelight. The biggest hurdle has been that contributions could
total no more than $2,000 per year, as opposed to $24,000 or
more per couple for 529s, depending on the particular plan.
There are no state-level tax advantages, as there are with
529s, and a family's modified adjusted gross income must be less
than $110,000 (or $220,000 if filing a joint return), to
establish an account and contribute annually. No such income
limits exist for 529s.
While no figures have been compiled on just how much money
taxpayers have invested in Coverdells since created in 2001,
deposits in 2009 - the last year statistics were made available
- amounted to just $718 million. The total invested in
Coverdells is likely a tiny fraction of the $179 billion in the
Because Coverdells are little used, many financial planners
are not even aware they exist. In fact, observers expected the
ESA would meet a quiet demise in 2013.
But Congress saved Coverdells from expiring once before as
part of the Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010. Coverdells stand out, however,
because they have key features 529 plans lack, which likely
played a role in their preservation.
The new Coverdell rules in the American Taxpayer Relief Act
preserve some unique advantages and offer some new tax-free
savings opportunities for parents to defray the cost of
education - from elementary through college years.
Contribution limits remain fixed at $2,000 per year,
although Congress can act to change that ceiling at any time.
There is now no age limit for special-needs students who seek to
keep their accounts open. For other children, the remaining
balance of any Coverdell account must be distributed once they
reach age 30.
"It's another tool. Obviously it has limits and caps on it
... but it's got its purpose," said Eleanor Blayney, consumer
advocate for the Certified Financial Planner Board of Standards.
You can use both Coverdells and 529s in conjunction, but
carefully. You have to justify any primary or secondary school
expenses offset by your Coverdell to the Internal Revenue
Service. What's more, you cannot justify the same college
expenses to both accounts, Blayney said.
The biggest advantage to Coverdells is that the funds can be
used for expenses at the elementary and secondary levels, and
for special services, none of which are covered by 529s.
Paul Coverdell, the late Republican senator from Georgia who
championed the funds, saw them primarily as a way to offset
private school tuition. Yet private school fees have
sky-rocketed, making the income cap on the accounts generally
too low for people who shell out $40,000 a year for
For parents of special-needs children, however, the accounts
could be useful, said John Vento, a CPA who runs his own
accounting firm in New York City and is the author of the
upcoming book "Financial Independence (Getting to Point X): An
Advisor's Guide to Comprehensive Wealth Management."
While $2,000 per year may not sound like a huge amount of
money, it can make a difference for parents whose children may
need special schooling that is not university-based and for a
longer period of time.
Suppose your special-needs child has difficulty with
handwriting. Coverdell funds can be used to buy computers,
printers, peripherals and even Internet access to put that child
on an even playing field with their peers, according to Vento.
"If your student needs a one-on-one aide with him and the
school doesn't cover the expense, this service qualifies, as
does special equipment necessary to accommodate him," he said.
In terms of the sheer math, Coverdells can add up over time.
Investment options are open to any savings vehicle, such as
exchange-traded funds, mutual funds or even individual stocks,
as opposed to 529s, which are limited to what the plan sponsor
offers and require a money manager.
If you save $2,000 a year for 18 years in a Coverdell, an 8
percent return will turn that into $74,900 - a yield of $38,900
that is completely tax free. Leave it alone until the child
reaches 30 and it would be worth about $226,566, which could be
helpful as a trust fund for later in life.