Sunday, September 17, 2006

Coverdell Education Saving Account Changes

I mentioned earlier that 529 plans had their federal tax deduction permanently extended which nice since it helped those investing in 529 plans to feel more comfortable and not have to worry that these deductions would expire. Unfortunately, the rule changes for education accounts aren't always positive.

For those that have Coverdell Education Saving Accounts, one of the nice advantages is that the money in the accounts can be used for private elementary and high school expenses. Beginning in 2011, this will no longer be the case. Coverdell funds will no longer be able to be used for elementary or high school tuition or related expenses. The money invested in Coverdell saving accounts will still be able to be used for college.

Those who were planning to use their Coverdell account to help with private primary education will need to figure out a new strategy. If you choose to use the Coverdell funds for the private primary education from 2011, the money will lose its tax-free withdrawal status on the earnings and a 10% penalty will be imposed.

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