College Savings – Coverdell ESA

You can thank the gentlemen to your left for making it easier for most of us to save for college.  Paul Coverdell sponsored the bill that allowed for the formation of an investment account specifically for higher education.

Basics

The Coverdell ESA is probably the best option for long-term college savings.  Previously known as the Education IRA, the Coverdell ESA was designed to provide a tax-advantaged savings vehicle for college and university expenses.  You can open an account for each of your children, but there are restrictions and some people won’t be eligible.

Benefits

• Contributions can be invested in an almost endless number stocks, bonds, mutual funds.
• Distributions can be made for any qualified higher education expenses, including tuition, room and board, supplies, etc.
• Distributions can be made for qualified PRIMARY AND SECONDARY education expenses.  (Yes, that means you can use it for private high school tuition.)
• Distributions are tax-free for qualified expenses.
• Accounts can be transferred to family members without penalty

Burdens

• Contributions are limited to $2000 annually
• To be eligible, your AGI (Adjusted Gross Income) must be less than $110,000 (single) or $220,000 (married filing jointly).
• If the funds aren’t used for qualified education expenses, they will be subject to income tax and a 10% penalty.

Recommendation

The ESA, if you’re eligible, should be your first choice when saving for college.  Because of the  flexibility and tax advantages, it’s a great vehicle to provide your children with a head start.  You can open an ESA through almost any major bank or brokerage firm.

On Friday, we’ll take a look at 529 plans…