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What Students Qualify for Coverdell College Savings Plans?

In a major departure from the Section 529 definition of “qualifying students,” Coverdell qualifying students consist of almost anyone who’s studying anything. You can use distributions from your Coverdell ESA all the way up to and through college and graduate school. There are some caveats, though, that you need to remember.

  • Age limitations at time of contribution: In general, you have 18 years in which you, or anyone else, for that matter, can fund a Coverdell ESA for your child, from his date of birth until the day before his 18th birthday. After that, you’re done. No matter how much or how little you’ve managed to put away for that student, you can’t add any more to the account. Any increases from now until the termination of the account will have to come from the earnings off your good investments.

  • Age limitations at time of distributions: Coverdell ESAs must be completely distributed by the time your designated beneficiary hits his or her 30th birthday. If money is still left in the account on that date, it must be distributed within 30 days, and any earnings on it will be taxed to the beneficiary, plus whacked with a 10 percent penalty.

    If you’re fast approaching your beneficiary’s 30th birthday and substantial money that you may not want to be giving as a birthday gift remains in the account, you can change the designated beneficiary on the account to a member of the current beneficiary’s family, provided, however, that the new beneficiary is under age 30.

  • Saving for disabled and special-needs students: While members of Congress have essentially stated that your children should have completed their educations by their 30th birthday, they do recognize that some students will spend their lives in special schools. Accordingly, if you’re the parent or grandparent of a special-needs student, there are no age limitations either on contributions or distributions on behalf of these students.

    Regulations defining who exactly is a special-needs student haven’t been released, and no one is sure where the line defining a disability will be drawn. For instance, total deafness may be included, but 50-percent hearing loss could fall outside the boundaries. If you feel that your student’s disability or special need may not be severe enough to fit a narrow definition and if you’re approaching the ordinary deadline for contributions, you may want to err on the side of caution and stop contributing at age 18 until clearer guidelines are available.

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