Let’s face it, college is expensive and I don’t see it getting any cheaper. How do we possibly prepare ourselves for such a large expense? Coverdell Education Savings Accounts are a great option.
A Coverdell ESA is an education IRA. Unlike state 529 plans, Coverdell ESAs can be used to pay for qualified elementary and secondary education expenses. Earnings grown on a tax deferred basis, and distributions are tax-free if the money is used to pay for qualified education expenses.
For example, if you make nondeductible contributions of $2,000 every year for 16 years your account will grow to $54,426 with a 6% annual return.
Important facts about the Coverdell ESA:
- The funds must be used before the child reaches the age 30.
- Qualified education expenses include: tuition, fees, books and equipment required for enrollment or attendance at nearly any post-secondary education institution (public, nonprofit or proprietary) Certain room and board expenses also may qualify. Qualified expenses also include these same expenses for elementary and secondary education, and the purchase of computer technology or equipment that is used by the beneficiary and the beneficiary's family while the beneficiary is in school.
- If the child decides not to go to college or leaves school before all the funds are withdrawn, you can roll unused funds into the Coverdell ESA of another child in your family.
- The tax treatment of Coverdell ESAs is much the same as that of 529 plans with a few important differences. Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution. However the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university.
