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Education & Custodial Accounts

Coverdell Education Savings Account (ESA)

The Coverdell Education Savings Account (ESA) was set up to encourage saving for education. It allows the account to grow tax free and allows tax-free withdrawals for qualified college education expenses. Because of age restrictions regarding when the funds must be fully withdrawn, this account cannot be used for retirement purposes without tax penalties. It does give an advantage to students applying for federal financial aid, because appropriate withdrawals are not considered income.

Eligibility: Beneficiary must be under 18
Investment Minimum: $1,000
Contribution Limit: $2,000 per year, per child

Contributions may be made until the beneficiary is 18 years old
Income Restrictions: $220,000 for joint-filing contributors

$110,000 for single-filing contributors

(Your financial advisor can provide additional details)
Tax Considerations: Earnings grow tax free
Qualified withdrawals for higher education expenses are tax free
Distributions may be used for K-12 expenses (this provision expires in 2010)
Withdrawal Restrictions: Non-qualified withdrawals trigger income and penalty taxes

Funds must be fully withdrawn for educational purposes by the time the child reaches age 30. At that time, remaining funds will be distributed to the child and subject to tax.
Control of Account: Parent or account custodian until child reaches age of majority (18 or 21, depending on the state)