I am interested in Coverdell Education Savings Accounts because they can be used to pay for private elementary and high schools. That seems like an advantage over 529 education savings plans. As I understand it, 529 accounts can only pay for college. Is my understanding correct?
And can I count on a Coverdell account after 2010? Are there any income restrictions on Coverdell accounts?
- R.G., Discovery Bay, Calif.
Unfortunately, you cannot count on Coverdell accounts to remain as attractive after 2010 unless Congress steps in and saves some of their important features.
Coverdell accounts are versatile. You can save money in them for years without being taxed on the earnings. And you can use the money you have saved to pay for private schools for young children and high school students.
You can even use them for educational expenses for any student, including computers and software. And you can use them to pay for college.
When you use the money from a Coverdell appropriately, you won't owe any tax on it.
You have less freedom with 529 college savings plans, which are offered by state governments. They can only be used tax-free for college.
After 2010, however, Coverdell accounts stand to lose some of their bells and whistles.
By 2011, you would no longer be able to use Coverdell accounts to pay for elementary and high school, said Joseph Hurley, founder of SavingForCollege.com.
Furthermore, when you use Coverdell money to pay for college, you will not be able to use important credits when you do your taxes.
The money you pull out of the Coverdell will not be taxed, and that's valuable. But also valuable are tax credits known as the lifetime-learning credit and the hope credit. You claim them on your tax return, and they can be worth more than $2,000 a year for families with college students.
Last year, Congress passed an act that lets families use the tax credits along with 529 money but neglected to do the same for Coverdell accounts.
Hurley said Coverdells were ignored for two reasons: Because people can deposit only $2,000 a year in them, compared with over $100,000 for 529s, the financial-services industry had little interest in lobbying for Coverdells.
Also, he said, Coverdells are sometimes unpopular with Democrats because they can be used for private-school tuition.
Still, if your income is relatively high, you may not qualify for college tax credits anyway.
To take either of the tax credits when students are in college, your modified adjusted gross income must be less than $55,000 if single or $110,000 if married.
Also, to put money in a Coverdell account in the first place, your income must be below $110,000 if single or $220,000 if married.
You could still contribute to a Coverdell now, even if you are worried about what will happen in 2010.
Under current laws, you are allowed to move money from a Coverdell account to a 529 account later. You can also save for college in both 529 and Coverdell accounts.
So that leaves a lot of flexibility if Congress continues to snub Coverdells.
Messages can be left for Gail MarksJarvis at 312-222-4264