New Limits For Education Savings Accounts

Changes are looming for Coverdell Education Savings Accounts.

Coverdell accounts let you save for educational expenses, then withdraw the money tax-free. But new limits are set to go into effect in 2013 unless Congress acts.

Basic annual contribution limits will drop to $500, from the current $2,000, according to the Internal Revenue Service. That amount is both for what a beneficiary can have contributed in his or her name and what an account owner can contribute per beneficiary.

The income cutoff for contributing will fall to $160,000 for married couples filing jointly, from $220,000. It stays at $110,000 for single filers.

The list of eligible expenses will shrink as well. Currently, money in Coverdell accounts can be used for qualifying expenses for college and graduate school as well as kindergarten through high school—including private-school uniforms and computers. But starting Jan. 1, you'll only be able to use the money for qualifying college or graduate-school expenses.

If you think you'll want to use the Coverdell dollars despite the new restrictions, max out contributions this year.

If you were planning to use the account for one of the expenses that will be excluded next year, try putting the money to use this year. For instance, prepay tuition, stock up on uniforms or buy that new PC.

Source:  Rachel Ensign, Wall Street Journal

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