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  • Coverdell Education Savings Accounts—Now Safe from Taxation—Could Still Be Improved

    Congress and President Obama preserved the rules regarding Coverdell Education Savings Accounts (ESAs) when they passed the “fiscal cliff” deal. Coverdell ESAs are the lone tax break available to parents for kindergarten through twelfth grade education expenses.

    But beginning January 1, 2013, the accounts were going to be only useful for college. Congress and the President did the right thing by removing the uncertainty and making the Coverdell ESA rules regarding grades K–12 permanent. More families will have access to educational options that meet their child’s unique learning needs.

    Coverdell ESAs enable users to invest up to $2,000 per child per year. Users can choose between different types of investments such as certificates of deposit, stocks, bonds, mutual funds, or others. Investment earnings are tax-free and can be used to pay for future education expenses, such as private-school tuition, computers, tutoring, or online learning.

    Maintaining the Coverdell rules is a favorable development for families with the accounts. Otherwise, the money parents had in the ESA would have been tied up until, and if, their child attended college. The yearly contributions allowed would have declined from $2,000 to $500 in 2013. The annual limit being permanently set at $2,000 per child is an improvement going forward. However, higher contribution limits would be better.

    Heritage Foundation analysts Lindsey Burke and Rachel Sheffield highlighted ways to improve Coverdell ESAs, including lifting the $2,000 annual per child cap. They point out that doing so would provide families with greater school choice options by enabling them to save more money for their children’s education. They further recommend:

    [P]olicymakers should ensure that measures are in place concerning potential tax penalties if money earned in a Coverdell account is not used for education-related expenses. If a child does not attend a private school, or for whatever reason cannot use the money accrued in the account, contributors should be allowed to either hand that money down to the next generation without a tax penalty, or to roll it into their gross income without an additional tax penalty.

    The school choice options of families would be expanded if these recommendations were put into law. Expanding school choice options and incentivizing parental investment in education is good policy and will improve excellence in education.

    Posted in Education [slideshow_deploy]

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