This year, if Congress and the President fail to act on Coverdell Education Savings Accounts, parents are scheduled to be left out in the cold. Rules concerning how parents are allowed to spend money they have earned in their Coverdell accounts are tied to the expiring Bush tax cuts. If the federal government takes no action, parents will not be allowed to use funds they intended for their children’s education.
Coverdell Education Savings Accounts are financial accounts that enable the user to invest their own money tax-free for their children’s future education expenses. The funds can earn interest tax-free in certificates of deposit for example, or may be invested in stocks, bonds, mutual funds, or other markets. It is up to the owner’s discretion how he or she wants to deploy the education dollars. Up to $2,000 per child per year can be deposited in the accounts. Disbursements for qualified education expenses are tax-free, meaning no income taxes, capital gains taxes, dividend taxes, or other taxes must be paid on the profits earned.
Coverdells have traditionally been utilized by parents who want to use disbursements from the accounts for kindergarten through high school tuition and fees, as well as paying for college later. In 2013, unless action is taken to halt the nonsensical sunset provision of the 2010 law that President Obama signed, the law will change. Accrued earnings must then be taxed when used for kindergarten through 8th grade, and to top it off, a 10 percent penalty for withdrawal before college will apply.
Here is some more information about Coverdell Education Accounts from the IRS.
After bailing out the big banks, the car companies, and others, allowing kindergarten through 12th grade Coverdell account disbursements to expire would be a clear signal on the part of legislators that middle-class families can be ignored. Congress would be wise, however, to show that Mom and Dad investing in their children’s education is a priority. Coverdell accounts have empowered parents to better direct their children’s educational options. Federal policymakers should work to ensure these options are upheld in the coming year. Congress and the President should remove the uncertainty and make the rules regarding these accounts permanent now.