Are you considering investing in your child’s college education? Ever wonder which college savings program is right for your specific financial situation? Well you’ve come to the right place. In part 1, I discussed the 529 College Savings plans. You can read about the 529 college savings plan here:
In today’s post, I will talk about the second type of college savings plan: The Coverdell Education Savings Account.
Coverdell Education Savings Account
The Coverdell ESA is a type of investment account where non tax deductible cash is contributed into the account for the benefit of a child under the age of 18. The contributions are limited to $2,000 per year and contributions grow tax free within the account. Money withdrawn from the account is free from taxes and penalties as long as the money is used for qualified education expenses. If the money is used for anything else it will be taxed at standard income tax rates plus a 10% penalty.
Advantages of Coverdell ESA’s
- The owner of the account has the ability to direct the specific investment choices.
- A family member can contribute money to a Coverdell ESA in conjunction with a 529 plan.
- An unused Coverdell ESA can be rolled over for a family member of the original beneficiary.
- Withdrawals are tax free for students enrolled full time, half time, or less than half time.
- The account can be used for qualified education expenses for elementary and secondary education (kindergarten through grade 12) at public, private, or religious schools.
Disadvantages of Coverdale ESA’s
- The Annual contribution limit is $2,000.
- No contributions can be made to the account once the beneficiary turns 18.
- The money must be used by the time the beneficiary turns 30 or rolled over into another Coverdell ESA for a family member of the original beneficiary.
- Withdrawals cannot exceed the beneficiary’s qualified educational expenses otherwise it will be taxed.
- The contribution amount to a Coverdell ESA is phased out for married couples with adjusted gross income between $190,000 – $220,000 and for all others with income between $95,000 – $110,000.
Definition of Qualified Education Expenses
- Tuition, fees, tutoring, special needs services, books, and supplies
- Room and board, uniforms, transportation, and extended day programs required by the school in which the beneficiary attends
- Computer technology, equipment, and internet access
Next I’ll discuss the pros and cons of using a Traditional or Roth IRA for college savings, check it out here.