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MAP's financial advisors As part of its full-spectrum service, the Michigan Association of Police provides all members, cost-free, the financial planning and insurance coverage expertise of the Raider-Dennis Agency. Certified Financial Planner Stuart Raider submitted the following article to News 'n Views. If you're thinking about ways to fund your child's education, the federal government has a special incentive that you should consider. It's the Coverdell Education Savings Account (ESA), which formerly was called an Education IRA. Contributions are not deductible, but tax-free withdrawals can be made when used to pay for eligible education expenses. This will be the case until Dec. 31, 2010, when changes from the Economic Growth and Tax Relief Reconciliation Act are scheduled to "sunset." There are, however, income eligibility limits for parents who wish to open a Coverdell ESA for their child. For example, last year the ability to make contributions phased out for single taxpayers with adjusted growth incomes between $95,000 and $110,000, and for married couples filing a joint return, with adjusted growth incomes between $190,000 and $220,000. It's safe to say that these changes did not affect many of us. Meanwhile, anyone who wishes may contribute up to a maximum of $2,000 annually per child before the designated student reaches age 18. For gift tax purposes, contributions fall under the annual $11,000 and $22,000 gift tax exclusions for singles and married couples, respectively. Be sure to keep in mind that, if you also contribute to a 529 plan for the same child, you will need to add these gifts together to determine your gift tax filings. There is no limit to the number of accounts that may be held in the child's name, or the number of people who make contributions to a Coverdell ESA, as long as total contributions remain within the $2,000 annual limit per child. If multiple accounts are established and more than $2,000 is contributed in total, the excess amount is subject to a 6% excise tax penalty. You can, however, eliminate the penalty by withdrawing the excess contributions - and any earnings - before the due date for the beneficiary's tax return for that year. The withdrawal would be considered income and be subject to taxation. It's noteworthy that Coverdell ESA's can be used to save and pay for educational expenses not associated with college. They now also can be used to pay for elementary and secondary school expenses, including the purchase of computer systems, educational software, and Internet access for the child. A Coverdell ESA must be spent by the beneficiary prior to his or her 30th birthday. If the designated child does not use the funds for educational purposes by that age, the account may be rolled over for use by another member of the family but only if the new beneficiary is at least one generation below the former beneficiary. Also bear in mind that withdrawals from a Coverdell ESA that are not used for qualified education expenses may be subject to both income taxes and a 10% penalty.
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