Your Child’s Education Can be Expensive, Duh
In our last blog, we discussed custodial accounts, which can be an effective way for families to save for their children’s education. Here’s another idea to consider—a Coverdell Education Savings Account (CESAs), formerly known as an Education IRA.
With college costs increasing at twice the rate of inflation, it’s important to start saving early, whether you currently have children or not. Interest working for you now in a regular savings program is far better than interest working against you in the future in the form of education loans.
Titled for a guy named Coverdell (actually the late Senator Paul Coverdell of Georgia who sponsored the legislation), Coverdell ESAs help families save money for the cost of elementary, high school or higher education for a designated beneficiary. Money grows tax deferred and proceeds can be withdrawn tax-free for qualified education expenses at a qualified institution.
If your modified adjusted gross income is less than $110,000 (or $220,000 if filing a joint return), you may be able to establish a Coverdell ESA. Contributions of up to $2,000 in total can be made per child under the age of 18, no matter how many accounts have been established. Only cash can be contributed to a Coverdell ESA and the contributions must stop after the individual turns 18, unless he/she is a special needs beneficiary. The deadline to open and fund a Coverdell ESA is April 15th for any tax year.
Here are some of the qualified education expenses a Coverdell plan:
Tuition and fees
Books, supplies, and equipment
Academic tutoring
Special needs services for a special needs beneficiary
Room and board
Uniforms
Transportation
Not to confuse things, but many of you may have heard about a 529 plan, which is also a popular investment vehicle to save for your child’s education. The main difference between a Coverdell ESA and a 529 plan is the way you invest the money. With an ESA, you can choose almost any kind of option—stocks, bonds, mutual funds. You can't do that with a 529 and assets in that plan can be used only for higher education.
To learn more and get started on a Firstrade Coverdell ESA, click here to apply.
