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Should I open a Coverdell education savings account?

Answer:

A Coverdell education savings account can play a part in your college savings strategy, but its relatively small annual contribution limit makes it more useful as a supplement to an overall larger savings strategy.

Once a Coverdell account is open, you can contribute at any time during the year, and you even have until April 15 of the following taxable year to make a contribution for the current taxable year. In addition, contributions can be made by an entity, including a tax-exempt entity, on behalf of a selected beneficiary.

The main benefit of Coverdell ESAs is tax related. Specifically, money you withdraw to pay your child's college education expenses is completely tax free, including earnings. (Generally, distributions are tax free if they are not more than the beneficiary's education expenses for the year.) Coverdell ESAs have many favorable features:

  • You can contribute up to $2,000 per year for a selected beneficiary
  • You can use Coverdell ESA funds to pay elementary and secondary school expenses.
  • You can contribute to both a Coverdell ESA and a 529 plan (prepaid tuition plan or college savings plan) in the same year for the same beneficiary.
  • You can claim either the American Opportunity credit (Hope credit) or the Lifetime Learning credit in the same year you take a tax-free distribution from a Coverdell ESA (though the education expenses paid with the Coverdell ESA distribution can't be the same expenses used to qualify for the credit)

Before you consider opening a Coverdell ESA, though, you'll have to meet certain income limits. Single filers must have a modified adjusted gross income (MAGI) of $95,000 or less to make the maximum $2,000 contribution, and joint filers must have a MAGI of $190,000 or less. A partial contribution is allowed for single filers with a MAGI between $95,000 and $110,000, and for joint filers with a MAGI between $190,000 and $220,000.

Please be advised that this materials is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transactions(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent advisor.

Information provided has been prepared from sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is not intended for solicitation or trading purposes. Please consult your tax and legal advisors regarding your individual situation. Neither AXA Equitable nor any of the data provided by AXA Equitable or its content providers, such as Broadridge Investor Communication Solutions, Inc., shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the AXA Equitable website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.

AXA Equitable Life Insurance Company (NY, NY). Securities are offered through AXA Advisors, LLC, NY, NY 212-314-4600 (member FINRA / SIPC). AXA Equitable and AXA Advisors are affiliated companies, do not provide legal or tax advice and are not affiliated with Broadridge Investor Communication Solutions, Inc.

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GE 51573 (12/2009)