The Coverdell IRA is a tax-advantaged savings account designed to help families save for education expenses. Contributions to a Coverdell IRA are not tax-deductible, but earnings grow tax-free, and qualified withdrawals for education expenses are also tax-free. The account can be used for various educational expenses, from kindergarten to college.
Which of the following is NOT a qualified education expense for a Coverdell IRA?
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A) College tuition is a qualified education expense. B) High school textbooks are a qualified education expense. C) A new car for the beneficiary is not a qualified education expense. D) Tutoring services are a qualified education expense.
What is the maximum annual contribution limit for a Coverdell IRA?
A) The maximum annual contribution limit for a Coverdell IRA is $2,000. B) $5,000 is not the correct contribution limit. C) $6,000 is not the correct contribution limit. D) $7,000 is not the correct contribution limit.
Which of the following is a key difference between a Coverdell IRA and a 529 plan?
A) Coverdell IRAs have lower contribution limits than 529 plans. B) Coverdell IRAs can be used for a wider range of education expenses. C) Both Coverdell IRAs and 529 plans offer tax-free growth. D) Coverdell IRAs have income limits for contributors, while 529 plans do not.
In the early 2000s, a family with two children began saving for their children's education expenses by opening Coverdell IRAs for each child. Over the years, they contributed the maximum amount allowed each year and invested the funds in a diversified portfolio. By the time the children were ready for college, the accounts had grown significantly, and the family could use the tax-free withdrawals to cover a significant portion of their children's college expenses.
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Example Series 65 Example Practice Question
A couple with a young child opens a Coverdell IRA to start saving for their child's future education expenses. They contribute $2,000 yearly and invest the funds in a mix of stocks and bonds. Over time, the account grows, and when their child is ready for college, they can use the tax-free withdrawals to help pay for tuition, fees, books, and other education expenses.
- Maximum annual contribution: The maximum amount that can be contributed to a Coverdell Education Savings Account (ESA) per beneficiary each year. - Income limits: The income thresholds that determine the eligibility of the contributor to make contributions to a Coverdell ESA. - Age limit: The age limit for the beneficiary to receive tax-free distributions for qualified education expenses.
- Maximum annual contribution example: The maximum annual contribution to a Coverdell ESA is $2,000 per beneficiary. - Income limits example: For single filers, the ability to contribute to a Coverdell ESA begins to phase out at a modified adjusted gross income (MAGI) of $95,000 and is completely phased out at $110,000. For joint filers, the phase-out range is between $190,000 and $220,000. - Age limit example: The beneficiary must be under the age of 18 when the account is established, and distributions must be used for qualified education expenses before the beneficiary turns 30.