2013 coverdell limit

[southwest_stacker]

I was getting ready to do the contributions for the kiddo's 2013 Coverdells and I was wondering if anyone has heard anything about the limits. It has been $2000/yr forever but was supposed to go down to $500/yr with all the fiscal cliff hoopla. I have not been able to find anything on if the $2000 was preserved with the deal they made.

[sscritic]

Coverdell is 26 USC § 530

The new law is here:
http://www.gpo.gov/fdsys/pkg/BILLS-112h ... hr8eas.pdf

Can you find 530 in it? I can't, nor can I find coverdell.

However, market watch says it is in the new law.

The new law also includes a provision that makes some temporary, user-friendly features of Coverdell Education Savings Accounts — tax-advantaged investment accounts used for education purposes — permanent. That includes extending the $2,000 annual contribution limit and allowing families to use this vehicle to save for elementary and secondary school expenses — not just college. These features were scheduled to expire this year, which would have lowered the maximum annual contribution limit to $500 and restricted Coverdells just to college expenses.

So where is it? In the very first item:

SEC. 101. PERMANENT EXTENSION AND MODIFICATION OF
2001 TAX RELIEF.
(a) PERMANENT EXTENSION.—
(1) IN GENERAL.—The Economic Growth and
Tax Relief Reconciliation Act of 2001 is amended by striking title IX.

EGTRRA contains the Coverdell.

Coverdell Education Savings Accounts (ESAs) were previously known as Education IRAs. They were originally established by the Taxpayer Relief Act of 1997 (P.L. 105-34), and then subsequently expanded by the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA).

Without the made permanent, we would have gone back to 1997.

P.S. and it wasn't modified by the modifications to the EGTRRA. One such modification is the new taxes on higher incomes.

[umfundi]

I was getting ready to do the contributions for the kiddo's 2013 Coverdells and I was wondering if anyone has heard anything about the limits. It has been $2000/yr forever but was supposed to go down to $500/yr with all the fiscal cliff hoopla. I have not been able to find anything on if the $2000 was preserved with the deal they made.

Just for my own information:

Why a Coverdell rather than a 529? I tried to move a Coverdell to Vanguard in 2010, and they refused. So, it was rolled to a 529.

Is there any advantage to a Coverdell over a 529, assuming you can still find one?

Keith

[Mel Lindauer]

I was getting ready to do the contributions for the kiddo's 2013 Coverdells and I was wondering if anyone has heard anything about the limits. It has been $2000/yr forever but was supposed to go down to $500/yr with all the fiscal cliff hoopla. I have not been able to find anything on if the $2000 was preserved with the deal they made.

Just for my own information:

Why a Coverdell rather than a 529? I tried to move a Coverdell to Vanguard in 2010, and they refused. So, it was rolled to a 529.

Is there any advantage to a Coverdell over a 529, assuming you can still find one?

Keith

Yes, there's a huge advantage. Coverdells can be used for lots of things 529 Plans can't. In addition to college, here's a listing from The Bogleheads' Guide to Investing:

Elementary and secondary education (kindergarten thru grade 12) tuition and fees, including public, private and religious schools.
Books and supplies.
Room and board.
Computers and Internet access.
Transportation.
Tutoring.
Contributions to a 529 Qualified Tuition Program.

[mhc]

Other advantages include lower cost options and more options. I can buy whatever I want from Vanguard (e.g., Total Stock Market Admiral fund).

[umfundi]

Other advantages include lower cost options and more options. I can buy whatever I want from Vanguard (e.g., Total Stock Market Admiral fund).

So,

Why would Vanguard not let me have a Coverdell (Education IRA) Account? It must be a 529, they said.

And no, 529 funds do not qualify for Admiral shares, so far as I know.

My confusion is rapidly increasing.

Keith

[sscritic]

I tried to move a Coverdell to Vanguard in 2010, and they refused. So, it was rolled to a 529.

move is not the same word as open, although I am not sure why it would matter.

https://personal.vanguard.com/us/whatwe ... anguardesa

[umfundi]

I tried to move a Coverdell to Vanguard in 2010, and they refused. So, it was rolled to a 529.

move is not the same word as open, although I am not sure why it would matter.

https://personal.vanguard.com/us/whatwe ... anguardesa

Interesting. Maybe it's just me.

I tried to move my sons' Coverdells / Education IRAs from T. Rowe Price to Vanguard in 2011. They told me, no can do. Must roll to a 529. That's what we now have.

I believe I (as the parent) am the owner. Then, and now.

I am not going to stamp my feet much over this, but I thought Coverdells were dead.

Keith

[EmergDoc]

They were dead, Congress just revived them. I already closed mine at Vanguard and Vanguard won't let me open another for now. That's okay, I prefer a 529 now that I am in a state with a good one.

[umfundi]

They were dead, Congress just revived them. I already closed mine at Vanguard and Vanguard won't let me open another for now. That's okay, I prefer a 529 now that I am in a state with a good one.

I am sure the Zombies are overjoyed.

Keith

[southwest_stacker]

Yes there are no Coverdell's at Vanguard. I have my kids coverdells at scottrade but buy Vanguard funds with them.

When we started the accounts 2k per child was about all we could afford and I liked the fact the coverdell was really simple, just like an IRA. You did not have to mess with any state specific plans and could just control it yourself like an IRA. I am sure there are plenty of good 529 options now and the higher 529 limits are nice but we will continue to max the coverdells while it is an option.

[sscritic]

Arghh. And I give others a hard time for not reading.

Note: Vanguard has removed ESAs from our lineup of college savings offerings (this includes any new accounts that would be established by an asset transfer). However, we will continue to maintain and allow contributions to existing ESAs.

From the link I provided earlier.

[dandan14]

I agree. I had the same conversation with Vanguard last week.
Congress has been threatening to cut out Coverdell ESAs for years, so I guess Vanguard just doesn't want the hassle. Scottrade told me they do them -- so I'm setting mine up there.
My plan is to put in $2000 for 2012 and $2000 for 2013 for each kid. (You have until April 15 on 2012 contribs.) So I can deposit $8000 in one pass. Even if ESAs get stopped next year, that $4000 should serve as a decent "computer fund" over the years.

Worst case scenario is that they kill the Coverdell ESAs and force us to roll over to 529s. So I just want to make sure that what I have in 529+ESA combined isn't more than they will need for college.

[sscritic]

Even if ESAs get stopped next year, that $4000 should serve as a decent "computer fund" over the years.

I guess we have different interpretations of the word permanent.

SEC. 101. PERMANENT EXTENSION AND MODIFICATION OF 2001 TAX RELIEF.

Maybe you can imagine Congress going back and starting a do-over on the Bush tax cuts, but I don't see it happening, not after what just happened this last year.

P.S. Now that they are permanent, Vanguard might start offering them again. Vanguard stopped when they were going to be cut back to $500 at the end of 2010 and saw no reason to start again as the same was set to occur at the end of 2012.

[Silence Dogood]

Wiki article on Coverdell Education Savings Account: http://www.bogleheads.org/wiki/Coverdell_Education_Savings_Accounts

[jjustice]

I wish I had seen sscritic's lexically informed research yesterday! I read all that I could find about the new law and checked Vanguard's site for an update. I concluded, wrongly, that the $2,000 limit had reverted to $500, and yesterday sent $500 each to Vanguard for my two grandchildren. (I had opened their accounts a few years ago, when Vanguard was still offering them.)

Oh well, I'll send in the rest now and call it dollar-cost averaging--even though I favor investing lump sums over DCA.

John

[umfundi]

I am reminded of the studies that show people were happier with their TV viewing choices when there were only three networks than today, when they have hundreds of choices.

How many flavors of tax-advantaged accounts can there be? That are useful and add value?
<end rant>

Keith

[NateH]

I have been looking for the 2013 limit since the deal was struck and knew eventually it would show up on bogleheads.

thanks sscritic & OP

[jdilla1107]

Yes, there's a huge advantage. Coverdells can be used for lots of things 529 Plans can't. In addition to college, here's a listing from The Bogleheads' Guide to Investing:

Elementary and secondary education (kindergarten thru grade 12) tuition and fees, including public, private and religious schools.
Books and supplies.
Room and board.
Computers and Internet access.
Transportation.
Tutoring.
Contributions to a 529 Qualified Tuition Program.

My understanding is that 529s can cover both "room and board" and "books and supplies": (Your wording implies to me that 529s can't cover these)

[sscritic]

My understanding is that 529s can cover both "room and board" and "books and supplies": (Your wording implies to me that 529s can't cover these)

But only for college, not for the military boarding school you are going to send your son to to break him of his drug habit (you hope). When I was growing up, military boarding school was a big threat in my life. My parents only dreamt about having a Coverdell to pay for it. I think that is why they never sent me.

[jon-nyc]

Am I missing something? An education savings plan with a 2k annual contribution limit seems almost useless in this day and age.

[umfundi]

Am I missing something? An education savings plan with a 2k annual contribution limit seems almost useless in this day and age.

$2k per year @ 8% for 20 years = $95k. Most of the cost of a decent in-state college these days. Hardly "almost useless".

Or, more than a year at Princeton.

Keith

[jon-nyc]

I suppose its a useful middle class benefit.

I doubt it'll cover a year at Princeton, though, it would have to grow at a much faster rate than the cost of Ivys.

[sscritic]

$2k per year @ 8% for 20 years = $95k. Most of the cost of a decent in-state college these days. Hardly "almost useless".

Or, more than a year at Princeton.

I hope you don't wait until your son is 20 to send him to military boarding school. Fifteen is a much better age, depending on his needs. But yes, 15 years at $2k per year will really help; it might cover one year, although I have heard that many military boarding schools are more expensive than Princeton.

[NorCalDad]

Am I missing something? An education savings plan with a 2k annual contribution limit seems almost useless in this day and age.

It'd be better if the limits were higher, but it might be helpful for someone like us who plans to go public K-8 but may send our kids to private high school. That's 12-14 years of appreciation and contributions that could cover 1-2 years of high school tuition. Better than nothing.

[asset_chaos]

Two days ago the Vanguard website had a $500 limit for Coverdell contributions in 2013. I transferred $500 into one child's account, but for the other children's accounts Vanguard's website told me there was a problem, wouldn't make the transfer, and told me to come back later. Today I went back, and the Coverdell contribution limit has reverted to $2000, with no problems in putting the full $2000 in each child's account. The $500 transfer had gone through: the website dutifully told me the account could still accept up to $1500 for 2013.

I applaud Vanguard staff's hard work: it can't be easy to keep up with the whims of congress.

[learning_head]

Am I missing something? An education savings plan with a 2k annual contribution limit seems almost useless in this day and age.

$2k per year @ 8% for 20 years = $95k. Most of the cost of a decent in-state college these days. Hardly "almost useless".

Or, more than a year at Princeton.

Keith

Just a quick observation: if "these days" 95k buys you a "decent" in-state college... then given recent 6% rise in total costs (4% in tution) in 20 years, by the time you need the funds in above example, you'd be looking at the cost of somewhere between

95k * (1.04^20) = $208k, and 95k * (1.06^20) = $305k

P.S. 95k is still decent chunk of that... but 8% return might be generous... especially since you should be converting to non-risky assets in last few years...

[jon-nyc]

That was kind of my point about Princeton.

My view is - at first approximation - I need 4 years of college saved today to pay for my son's 4 years of college in 15 years. Obviously that assumes that the market and college costs grow at about the same pace. Seems like a decent assumption if the past is any guide.

Edit to clarify the above point - I think the idea that market returns will outpace the rise in college costs, while entirely possible, is too optimistic a planning assumption for my taste. I'm personally comfortable with assuming they'll be about the same, knowing further additions might be necessary but also knowing I could end up overfunding somewhat.

[truthseeker]

As I gather from these posts here, Coverdell is still in play in 2013 and beyond with no changes to Coverdell in term of qualified expenses (e.g. K-12) etc., and one family can contribute up to USD 2000 for one kid ? Am I right here?

The thread is long, so I thought may be I should just sum up and confirm. I can't find anything very clear on the web about it. Let me know.

[Mel Lindauer]

Am I missing something? An education savings plan with a 2k annual contribution limit seems almost useless in this day and age.

Start early and invest wisely. And this can be just one part of your overall college savings.

[mhc]

As I gather from these posts here, Coverdell is still in play in 2013 and beyond with no changes to Coverdell in term of qualified expenses (e.g. K-12) etc., and one family can contribute up to USD 2000 for one kid ? Am I right here?

The thread is long, so I thought may be I should just sum up and confirm. I can't find anything very clear on the web about it. Let me know.

Coverdell still in play.
Can still be used for k-12 qualified expenses.
$2000 limit per child with certain income limits

[sls239]

I suspect that Vanguard will offer them again. For those that think 2K per year isn't enough, consider that there are other tax advantages like the lifetime learning credit and you aren't allowed to double dip. That means that you want to arrange for some of the expenses to be paid out of pocket and some paid out of the ESA to maximize the tax benefit.

[jon-nyc]

Am I missing something? An education savings plan with a 2k annual contribution limit seems almost useless in this day and age.

Start early and invest wisely. And this can be just one part of your overall college savings.

Well, not mine, due to the income limits. But I can see how someone may want to use this as part of an educational funding strategy.

[dianna]

Well, not mine, due to the income limits. But I can see how someone may want to use this as part of an educational funding strategy.

A child can contribute to his/her own Coverdell. One need not have earned income to contribute, and this is a way to bypass the income limits. Transfer $2000 per child from any of your accounts into a child-owned (or co-owned with parent) UTMA account and have the "child" contribute to the Coverdell.

http://fairmark.com/college/saving/cove ... ontrib.htm

Happy saving!
~dianna

(edited to add link to tax code information and explanation on why child can contribute to own Coverdell)

[MachuPicchu]

Well, not mine, due to the income limits. But I can see how someone may want to use this as part of an educational funding strategy.

A child can contribute to his/her own Coverdell. One need not have earned income to contribute, and this is a way to bypass the income limits. Transfer $2

http://fairmark.com/college/saving/cove ... ontrib.htm

Happy saving!
~dianna

(edited to add link to tax code information and explanation on why child can contribute to own Coverdell)

Brilliant! Thanks for the link, it answered many of my questions (max is $2,000 per child no matter how many contributors and even if the child is the "contributor" the amount in the Coverdell ESA is treated as part of the parents net worth for the purpose of calculating financial aid).

Any suggestions as to funds for my newborn?

[umfundi]

For what it's worth, I asked Vanguard this week if they were opening new Coverdell / Education IRA accounts. They said no.

Keith

[charlestown1978]

It seems like Fidelity does not offer them either. Anyone open one recently and have a good experience?

[dianna]

The Coverdell we have for our kid is through Charles Schwab; opened in 2010. Not recent, but perhaps recent enough. Our experience with them has been fine. No red carpet, but no red tape, either. Decent offerings with low ER's (.2-.4) and they offer some indexes. One could also buy single securities with the account if you want, but hey that's not very Bogleheadish. The Coverdell ESA account is linked to the UTMA bank account for ease of transferring funds.

[charlestown1978]

I took a look at Schwab and things are a little unclear, are you able to buy Schwab's index funds available to regular brokerage clients?

[dianna]

I took a look at Schwab and things are a little unclear, are you able to buy Schwab's index funds available to regular brokerage clients?

Short answer: Yes, it appears so.

I just logged back into the account to verify... Yes, it seems as though one can buy any of Schwab's Index Funds that they offer to brokerage clients. I see no limitations noted. Currently, we own a combination of SWISX (Schwab's International Index) and SWTSX (Schwab's Total Stock Market Index) in the account.

When I go to "Trade Stocks" under the Coverdell account, it asks me for the ticker symbol and if I go to Symbol Lookup it includes the following categories: Stocks, Preferred Stocks, Indices, ETCs, Listed Bonds and Mutual Funds. That's a pretty comprehensive list. When I selected Indices + Mutual Funds and then added "total market" to the search term, the engine provided 13 results, including Spartan, Fidelity, T Rowe Price, Schwab and Vanguard (a few of these were Admiral share level) indexed mutual funds.

[jspen]

I have Coverdells for my grandkids with USAA. Their website still has a link to open a Coverdell account, so if you're eligible for USAA membership, that would be a good option.

[Skyler]

TD ameritrade also seems to offer coverdell. I just asked for forms ( you can't open online - not with TD at least )

[svendsen]

Share builder offers Coverdell ESA's also.

[assumer]

I might be wrong but I seem to remember that the $2,000 coverdell contribution counts towards the gift tax exemption limit so be careful to fund $2k less in 529s for a given child if that's true.

Going to try to find sources now.

Edit: Source confirmed in our own wiki http://www.bogleheads.org/wiki/Coverdel ... ite_note-3
:
Also to whomever can edit the wiki, the gift tax exemption is now $14k http://www.irs.gov/uac/2013-Inflation-A ... x-Benefits

If you give me permissions I'd be happy to edit it.

[Skyler]

I might be wrong but I seem to remember that the $2,000 coverdell contribution counts towards the gift tax exemption limit so be careful to fund $2k less in 529s for a given child if that's true.

Going to try to find sources now.

Thx. What is the annual limit on 529?

[assumer]

Thx. What is the annual limit on 529?

There's no actual hard set limit like in Coverdells but it counts as a gift. You can gift somebody $14k per year before incurring taxes.

Also I am a bit unclear how gifting works when changing beneficiaries...

[letsgobobby]

529s allow you to front load five years of gifting in a single year, so $70,000 from one parent to one child (for example) in 2013 with no tax. Two parents, $140k.

[julieann]

I have a couple of questions. Although we do have 529 plans for our 3 children for college, we've also opened separate Coverdell accounts for 2 of our children for purposes of saving for private high school. We live in a city where public school isn't very good, so saving for private high school is very important to us, and Coverdell seems the only available tax-advantaged vehicle to do so.

As I've indicated, we only have 2 Coverdell accounts, although we have 3 children. Our 2 Coverdell accounts are at Vanguard. I had planned to open one at Vanguard for the youngest child but, unfortunately (as others on this forum have indicated), Vanguard is no longer allowing new Coverdells to be opened (which really sucks in terms of keeping all of the accounts together).

The other issue is that we are slowly but surely butting up against the income limitations on contributing to the Coverdells. So my plan, as recommended by someone else on this forum, is to open accounts for the 3 kids, gift $2000 each to them each year, and then transfer that $2000 each to their respective Coverdell accounts. This appears to be allowed under the tax laws. Goofy, but allowed.

So here are my questions:

1. Any suggestions on where to set up the 3rd child's Coverdell account since I can't go through Vanguard? I still want to use Vanguard funds. I'm thinking Scottrade, but I really know nothing about them (or any other brokerage firm for that matter).

2. Where or how do I set up accounts for the 3 children separately so I can gift money to them, and then transfer their money to their Coverdell accounts every year? My one child has a small savings account at ING (now CapitolOne), but they apparently don't allow transfers of money as I wanted to do for the Vanguard Coverdell. ???? So I guess regular savings accounts aren't going to work???

Help! I need suggestions. I didn't think this would be so complicated.

[dianna]

It's very nice of you to do this for these kids.

So here are my questions:

1. Any suggestions on where to set up the 3rd child's Coverdell account since I can't go through Vanguard? I still want to use Vanguard funds. I'm thinking Scottrade, but I really know nothing about them (or any other brokerage firm for that matter).

2. Where or how do I set up accounts for the 3 children separately so I can gift money to them, and then transfer their money to their Coverdell accounts every year? My one child has a small savings account at ING (now CapitolOne), but they apparently don't allow transfers of money as I wanted to do for the Vanguard Coverdell. ???? So I guess regular savings accounts aren't going to work???

Help! I need suggestions. I didn't think this would be so complicated.

re #1 - I haven't researched all of the different places where you can still open a Coverdell, but ours for our child is at Schwab and they offer very competitive ER's and also offer many many Vanguard funds (sometimes the minimum limit is more than the $2,000 you can contribute per year). To get above the minimum limit, you could consider transferring the 2 accounts you have at VG over to Schwab so that you have a higher amount to work with.

re #2 - the procedure we were coached through was to set up UTMA/UGMA bank accounts for each child, gift the money to each child (put the money in the UTMA/UGMA account), and then link each UTMA/UGMA account to each Coverdell (Schwab) account so it "appears" that the dollars are coming from someone who does meet the income qualifications. I get that this is a goofy procedure, but it is legal so why not take advantage of it? You are right that a regular savings account may not work; it may need to be a "checking" account. For what it's worth, our child's checking account balance is <$100 every point of the year except the few moments when the $2,000 is in there in between when we have deposited it and the Schwab Coverdell account removes it. So, you don't need to get rid of the savings account, just go through the procedure to open a new checking account for each child.

I hope this is helpful -
best wishes!

~dianna

[julieann]

Thanks, Dianna, that is very helpful. If you don't mind me asking, where did you open the UTMA/UGMA accounts at? Was that through a regular bank, or also through Schwab? My plan is to do exactly what you're doing....keeping a minimum amount in each account except when putting money in for the Coverdells.

Thanks!

Julie