While the economy is in a downturn, college tuitions and fees continue to grow. So what are your college savings options? Are Coverdell Education Savings Accounts a good one?
While most parents are dealing daily battles from finding matching shoes to investigating the sugar content in juices, thoughts of long term challenges like college tuition and fees continue aren’t out of mind either. While the economy is in a downturn, college tuitions and fees continue to grow. So what are your college savings options? Are Coverdell Education Savings Accounts a good one?
Coverdell Education Savings Accounts were formerly known as the Education IRA. It was created in 2002 as an improved version. It is named after the late U.S. Senator Paul Coverdell and was designed to help parents achieve higher education savings.
The Basics of Coverdell Education Savings Accounts:
It offers a tax shelter for education dollars.
Contributions are not tax deductible but are withdrawn tax-free when used for education.
Regardless of how large the balance grows, there is no tax owed on the capital gains provided it is used for education.
Like 529 college savings plans, Coverdell Education Savings Accounts, are not considered the ownership of the young adult when he or she applies for financial aid so a Coverdell account won’t work against financial aid.
What are the limitations of the Coverdell Education Savings Accounts?
One of the limitations of the Coverdell Education Savings Account, compared to the
Section 529 is an annual limit of $2,000 based on current tax laws, which of course could change at any time. This is lower than the contributions allowed in a Section 529 and other college savings plans.
Another important point is on the withdrawal requirements, although it really may not apply to most students. With a Coverdell Education Savings Account, the money has to be withdrawn before a student’s 30th birthday to avoid taxes. If a student is beyond the age of 30, the money will become taxable when withdrawn and it could be subject to a penalty. The good news is that there is a way to avoid this. The money can be transferred to another family member below the age of 30. As long as the money is transferred to another for educational purposes, the taxes and penalties are waived.
What are the advantages of a Coverdell Education Savings Account?
A Coverdell Education Savings Account offers greater investment flexibility. Parents or guardians can invest Coverdell Education Savings Account funds in practically any investment such as common stock of a start up company, preferred stock in a large, Blue Chip business, a mutual fund or even a money market account. Most brokerage companies and mutual fund companies offer Coverdell Education Savings Accounts. It is simply a matter of contacting a company, setting up a Coverdell plan, and choosing investments.
Another advantage is in the way Coverdell Education Savings Account and other education savings plans is the way the funds can be used. Many college savings accounts are limited to higher education expenses. But a Coverdell Education Savings Account can be used for any educational expense at any level including funds for elementary school or high school tuition at a private institution in addition to tuition and fees at a college or university.
A third advantage is that Coverdell Education Savings Accounts can be set up at most financial institutions including banks, brokerage houses and mutual fund companies.
Is a Coverdell Education Saving Account a good option?
A Coverdell Education Savings Account can certainly be a big help. It is one of several different educational savings tools offered and it has many qualities that make it a worthwhile education savings option for parents saving for college.
It’s ideal for parents who may be considering and need help paying for private school before college.
By taking advantage of the Coverdell Education Savings Account, parents can set aside a small amount of money each year to help pay for educational expenses as they become due.
The biggest disadvantage of the Coverdell Education Savings Account is, of course, the $2,000 annual limit on contributions. This means that for most parents, a Coverdell can’t be their only college savings plan if they don’t want to borrow money for higher education expenses.
You’ll need to assess current laws, based on tax laws Coverdell Education Savings Account have limits which vary each year and designate caps prohibiting participation based on income for single filers and married filers.
While a Coverdell Education Savings Account may not cover all expenses alone, it is a good starting place for saving up to $2,000 a year for college.