Using A Coverdell Education Savings Account To Reduce The Cost Of A Private High School

Parents planning for the future costs of education for their children don't usually consider the Coverdell savings account as their first option. Another type of savings plan has gained more popularity, but the other plan only applies to college and university expenses. A Coverdell education savings account is also applicable to younger students, providing tax benefits to offset the cost of a private high school.

Qualified tuition plans sponsored by many different states, also known as Section 529 plans, apply only to postsecondary education. A Coverdell account is a different type of plan. A Coverdell account has the additional ability to help pay the costs of elementary and high schools that charge tuition.

Tax planning

Contributions made up front to a Coverdell education savings account are not tax-deferred, so amounts contributed do not reduce your taxable income. The tax advantage arises as account earnings are allowed to grow tax-free. Over the course of several years, compound interest accumulates.

A beneficiary is designated when you open a Coverdell account. The beneficiary must be under age 18 when you open the account. If used for qualified education expenses, earnings are tax-free when distributed. The income tax advantage of a Coverdell plan is maximized by funding the account for several years prior to the eventual distributions.

Spending requirements

No further contributions are allowed into the account after the beneficiary reaches 18 years of age. Distributions can be used to pay for either public or private schools that charge tuition. Religious schools qualify, and the Coverdell account is also applicable to elementary school and kindergarten.

Contribution limits

The annual contribution limit for a Coverdell account is $2,000. The limit is the total amount that can be added to the account of a beneficiary by all contributors combined. In fact, there is a 6 percent excise tax on excess contributions over $2,000.

Distribution restrictions

In addition to tuition and books, account distributions can be used to pay for room and board. At the elementary and secondary school levels, the cost of uniforms and required transportation is also a qualifying expense. Special needs services are qualifying expenses at all educational levels.

If the account is not emptied by the time a beneficiary graduates high school, the student is able to use it for college expenses until the age of 30. The age limitations do not apply to special needs beneficiaries. Contact a tax services provider like Capital Accounting And Tax Service Inc, for more practical advice on how to utilize the federal income tax code to offset the cost of education..


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