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Coverdell Education Savings Account

November 26th, 2007 at 10:29 pm

A Coverdell Education Savings Account (ESA) is an ideal way for young families to save for their children’s educational expenses. With a Coverdell ESA, you are able to save $2,000 annually, for each of your children, from the time they are born until they reach age 18. The Coverdell ESA deposits may be made by anyone, providing a great way for grandparents to help in fund their grandchild’s education.

You may set up a Coverdell ESA account at any institution that offers IRA accounts. A Coverdell ESA has tax advantages that are similar to a Roth IRA.

While the initial contribution to the account is not deductible, all growth and income from the account escapes taxation, as long as the withdrawn funds are used for education related expenses. These expenses can include tutoring, computer equipment, room and board and even school uniforms.

Funds from a Coverdell ESA may be used to pay for educational expenses from kindergarten through graduate school. The longer that the funds are allowed to grow, the greater will be your financial benefit.

Your may fund both a Coverdell ESA and a Section 529 College Savings Plan in the same year. A Coverdell ESA has Adjusted Gross Income limits for the contributor of $190,000 for couples or $95,000 for individuals.

If your income exceeds that limit, perhaps your parents or even your child’s godparents might be willing to make the contribution. Remember, you can always gift up to $12,000 to anyone, without any gift tax consequences.

If the funds in a Coverdell ESA are not consumed before the beneficiary reaches age 30, the beneficiary receives the remaining funds and must pay both income taxes and a 10% penalty on the remaining funds.

To avoid this problem, you may rollover the remaining Coverdell ESA assets to a sibling, a niece, a nephew or even the beneficiary’s child.

Start a Coverdell ESA as early as possible in your child’s life to help fund their education. As Robert and Cindy find in Financial Abundance Guide, the $2,000 per year that they invest for each of their children grows to $54,300 by the time the child is 15, with an 8% annual return on the invested funds.

Tax free income makes the Coverdell ESA an excellent vehicle for educational savings.

4 Responses to “Coverdell Education Savings Account”

  1. scfr Says:

    Contributions to Coverdell accounts make excellent holiday gifts! My sister told the family several years back that her children really didn't need more toys, but that she could sure use some help saving for their college educations. Other family members continue to send toys, but I send her checks not only for their holiday gifts but for their birthdays as well.
    She has told me that when she finally sends them off to college she is going to tell them that they are able to go to college in large part thanks to "Auntie xxx."
    That's a good feeling.

  2. Ralph Says:

    What about the fact that this money is assessed at a very high rate in financial aid formulas?

  3. Coverdell ESA Info Says:

    ESAs are counted as the student's asset, which can reduce federal financial aid eligibility under current financial aid formulas.

  4. Mike Says:

    No, ESA's are counted as a parent's asset if established and held by the parent for the beneficiary. If the ESA is held by the student, then it would count as a student asset.

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