Coverdell Education Savings Accounts • CESA • education IRAs • roth ira • coverdell ira • ira withdrawal for education • saving for college

Tax Advantage:

Summary of tax advantages starting in Year 2002:

• Tax exempt earnings:
  
  

  ··	earnings and distributions from your EIRA account is tax free as long as the money stays into the plan and is used for "higher educational purposes"
  ··	"educational purposes" include tuition, room & board, books, fees, supplies, and equipment
  ··	"higher education" includes colleges, universities, vocational schools, or other post-secondary educational institutions that are eligible to participate in the student aid programs administered by the Department of Education see Department of Education for list of eligible schools

• Withdrawals from the fund are exempt from taxes:
  
  

  ··	all qualified distributions from the fund are exempt from federal taxes
  ··	if the beneficiary withdraws more than what is needed to pay for qualified expenses, the excess amount will be subject to income tax and a 10% penalty fee
  ··	you must be careful not to exceed qualified expenses, especially when distributions are made from EIRAs and potential 529 Plans

• EIRA may by used for elementary / secondary schools:
  
  

  ··	beginning in 2002, the EIRA may be used to pay for qualified expenses at elementary and secondary schools
  ··	qualified expenses include tuition, fees, tutoring, supplies, and equipment
  ··	qualified expenses will also include room and board, uniforms, transportation, and family use of computer technology and internet connections

Eligibility Requirements:

• Any individual (including the designated beneficiary) can contribute to the EIRA if the individual's modified adjusted gross income falls within the following thresholds:
  
  

  ··	if your income is less than $95,000 ($150,000 filing jointly), you can take the maximum contribution
  ··	if your income is between $95,000-$110,000 ($150,000 and $160,000 filing jointly), the maximum contribution is reduced
  ··	if you income is more than $110,000 ($160,000 filing jointly), no contribution will be allowed
  ··	these income levels increase in 2002

see IRS Publication 590 on Education IRAs for further information

• You may treat your contribution to the EIRA as a gift under the annual $10,000 gift exclusion clause.

Assigning the Beneficiary:

• The designated beneficiary must be under 18 at the time of any contribution — no further contributions will be allowed to the account once the designated beneficiary reaches the age 18
  

• The beneficiary can be anyone, not necessarily a family member
  

• Funds paid out of the account must go to the assigned beneficiary — funds cannot be refunded to the account holder
  

• The account holder will retain responsible rights over the account as long as the account remains open. The account holder can transfer custodial rights to the beneficiary once he or she reaches maturity.
  

• The account holder can change the designated beneficiary to anyone under the age of 30 who is a family member of the beneficiary
  

• The beneficiary has until the age of 30 to use the funds in the account for qualified "higher educational purposes"
  
  At which time, all remaining funds must be distributed to the beneficiary 30 days after their 30th birthday.
  
  

• Distributed funds past age 30 will be assessed a 10% penalty fee. In addition, earnings on the fund will be treated as taxable income to the beneficiary.
  

• There are exceptions to the penalty tax:
  
  see IRS rule 590

EIRAs vs. State 529 Plans:

• Both EIRA and State 529 plans offer the same tax benefits:
  
  

  ··	earning and distributions are exempt from federal taxes as long as the funds are used for qualified higher education expenses

• Advantages of 529 Plans:
  
  

  ··	larger contributions
  ··	no income eligibility requirements
  ··	control over the fund — fund can be transferred to another beneficiary at any time
  ··	no age limitation on use of fund

• Advantages of EIRAs:
  
  

  ··	starting in 2002, fund can be used for elementary and secondary school expenses
  ··	freedom to select any fund manager for the account — unlike 529 plans that must be administered by the state

• Depending on your financial income and tax level, both plans may offer advantages. You will be able to contribute to both funds up to assigned limits.
  
  See your tax advisor for further information.
  
  Need to find a tax advisor?

  Search online for CPA directory

  Search your local yellow page for CPAs

  Search your local yellow page for Tax Preparation

Expert Review Analysis:

• Education IRA reviews from:
  http://www.savingforcollege.com/
  
  
• Kiplinger's NewsLetter: Saving for College

Analyze Investment Objectives:

• Morning Star Fund Analysis:
  http://www.morningstar.com/
  
  
• Value Line:
  http://www.valueline.com/

Notes: Student Financial Aid Process

• Review our notes in our College Planning Center on the student financial aid process:
  
  Note 2: qualifying for student financial aid
  Note 3: reviewing the financial aid process
  
  
  
• 529 Savings Plans are counted as assets of the parent or guardian when calculating the "Expected Family Contribution" (EFC).
  
  
• The portion of the 529 Plan that will be included is 5.6%, or less, of the funds value for each academic year.
  
  
• Funds used from the plan to pay for the beneficiary's education costs will be included next year as income to the student when considering eligibility for financial aid.
  
  
• The portion of funds included as income may vary by institution. In addition the formula used to calculate EFC frequently changes. How 529 plans will be treated in the future is too premature to review at this time.
  
  
• Note that most financial aid comes in the form of loans. So the inclusion of 529 plans may not affect eligibility for student loans.