Coverdell Education Savings Accounts (ESAs) were originally established in 1997 and called "Education IRAs." They are investment trust accounts created to pay qualified education expenses, including primary, secondary, and postsecondary education, for a designated beneficiary. The beneficiary of the account must be under the age of 18 at the time of the contribution and the contributor's income must meet specific annual income guidelines. Total ESA contributions per child under age 18 may not exceed $2,000 per year.
Income phaseouts apply to make contributions: $95,000 to $110,000 for singles and $190,000 to $220,000 for married couples filing jointly (2012 figures). The contributions aren’t tax deductible on federal or state tax returns but the earnings accumulate tax-free. Withdrawals are not taxed so long as the money is used for specified education expenses such as tuition, fees, and books. Students who are enrolled at least half time can use the accounts to pay for room and board. Both full-time and part-time students are eligible for these savings accounts. If the balance of the education IRA isn’t used by the time the student reaches 30, it must be withdrawn or "distributed." At this point, the funds would be taxed and subject to a 10% penalty. This can be avoided if the balance is rolled over to another Coverdell account to benefit another family member. ESA accounts may be owned by a student or the student's parent and are treated as assets of the owner, which may affect eligibility for financial aid.
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