Coverdell Education Savings Account to Change After 2010

You might want to file this one under the “who cares?” section… Yet another expiring tax provision at the end of tax year 2010 is the expansion of the Coverdell Education Savings Account (ESA) that came into effect with EGTRRA 2001.

Through 2010

Until the end of 2010, you are eligible to make non-deductible contributions to a Coverdell ESA of up to $2,000 per beneficiary per year.  These contributions are phased out ratably when your Modified Adjusted Gross Income (MAGI) is between $95,000 and $110,000 for single filers; the phaseout occurs between $190,000 and $220,000 for married persons filing jointly (MFJ). The earnings from these ESAs can be withdrawn tax-free to cover qualified expenses for elementary school, middle school, high school, or college.  This is the only significant benefit to an ESA over a 529 plan – that the account can be used for schooling prior to college.  ESAs must also be distributed within 30 days of the beneficiary’s reaching age 30.

Beginning in 2011

Unless something is changed, beginning in 2011 the non-deductible contributions are limited to $500 per beneficiary per year, and the phaseout is the same as listed above for single filers.  The phaseout for MFJ filers is reduced to between $150,000 and $160,000.  In addition to the change to the limit and phaseout range, the ESA will only be allowed for qualified post-secondary (college) education expenses. It’s not clear at present if existing Coverdell ESAs will be allowed for funding elementary, middle school and high school on a grandfathered basis, or if the funds will no longer be allowed for these purposes.  If I had to put a bet on it, I’d wager that the current law will be extended indefinitely – with perhaps no new contributions will be allowed, effectively sentencing the Coverdell ESA to death at some point in the future.

Who Cares?

The reason I mentioned that this might go in the “who cares?” file is because, other than the ability to pay for elementary, middle, and high school, the ESA has no benefit over the much more popular 529 plans.  And if Congress allows the current provision to lapse, I doubt seriously if there would be any participation in the plans at all, due to the restrictive limits on the plans, plus the age 30 distribution requirement, which doesn’t exist for 529 plans.
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About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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