Mark your calendars! Next year, the treatment of money invested in Coverdell accounts could change drastically. The Coverdell "sunset" deadline is December 31st, 2010. That's the day when the current rules determining how much you can invest in Coverdell accounts, and what you can spend the money on, will expire (if Congress fails to act before then). You'll still have access to Coverdell accounts, but you won't be able to contribute nearly as much.
If you're preparing to send kids to college, you probably know about the popular options like 529 plans and UGMA / UTMA accounts. Coverdell accounts get a bit less attention. The Coverdell education savings account is a tax-advantaged savings account, much like a 529 plan). Coverdell accounts have a contribution limit of $2000 a year, and can be spent on certain educational expenses for your children in kindergarten through twelfth grade.
When the "Coverdell Deadline" arrives, the following changes will be made:
- You won't be able to contribute $2000 a year—the maximum will be reduced to $500.
- They will no longer apply only to kindergarten through 12th grade expenses. Instead, they will be available only for college expenses.
- You won't be able to claim the Hope Credit or the Lifetime Learning Credit in the same year that you withdraw money from a Coverdell plan.
Those with existing Coverdell accounts have some options. For parents whose children are about to enter college, the timing is perfect: the account's tax treatment will be the same for college expenses as it was for pre-college spending. If your children are younger, you may want to spend the money more quickly so you don't end up with extra, taxable money to spare.
Another option is to roll the money into a 529 plan. This can be a complex transaction, but the main requirement is that you withdraw the money from your Coverdell account, and deposit an equal or greater amount in a 529 plan that will spend the money on the same person. It may be helpful to discuss this with a financial advisor or a tax consultant.
Even though Coverdell accounts may be scaled back, you still have plenty of college savings options. You can continue to use your Coverdell without contributing as much to it, or you can invest money in a 529 account or other tax-advantaged plan. Learn more about the various ways to save for college or consult with your financial advisor in order to make the best decision for your family.