BofA Merrill Lynch Global Research is equity research produced by Merrill Lynch, Pierce, Fenner & Smith incorporated and/or one or more of its non-U.S. affiliates.
Any information presented about tax considerations affecting your financial transactions or arrangements is not intended as tax advice and cannot be relied on to avoid any tax penalties. Neither Merrill Edge®
nor its Financial Solutions Advisors provide tax, accounting or legal advice. You should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with your personal professional advisors.1
To be eligible for favorable tax treatment afforded to any earnings portion of withdrawals from Coverdell ESAs, withdrawals must be used for "qualified higher education expenses" or "qualified elementary and secondary education expenses," as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax as well as state and local income taxes.2
The eligibility limit for contributors depends on the individual's tax-return filing status and modified adjusted gross income ("MAGI"). There is a phase-out on the ability to contribute for individual taxpayers with MAGI between $95,000 and $110,000 and for joint-return tax-payers with MAGI between $190,000 and $220,000. If your MAGI is $110,000 (single) or $220,000 (joint) or more, you cannot contribute to an educational savings account.3
This does not apply to special-needs beneficiaries. An education savings account may be established and funded for a special-needs beneficiary of any age, and there is no requirement to close the account once the beneficiary turns age 30.4
Financial aid rules may change, and the rules in effect at the time the beneficiary applies may be different. For more complete information visit the Department of Education Web site at www.ed.gov
The account owner can change the beneficiary to another member of the family of the original beneficiary, without penalty provided the beneficiary is under age 30 or is a special needs beneficiary. Please refer to the Internal Revenue Code definition of "member of the family." If assets are contributed from an UGMA/UTMA account, the custodian may not change the designated minor, except as permitted by applicable law.6
The beneficiary must be attending an accredited institution at least half time for room and board to be considered an eligible expense.7
The first $1,000 of a child's income is tax-exempt, the next $1000 is taxed at the child's rate and unearned income over $2,000 generally is taxed at the parent's rate if, at the end of the year, the child is under age 19 or is a full-time student under age 24.