Coverdell Education Savings Accounts

I have written a couple of times about 529 college savings plans. Another alternative is the Coverdell Education Savings Account or ESA. While there are unique advantages to 529 saving plans the Coverdell ESA is a college savings vehicle you should know about.

Coverdell ESA's allow contributions of up to $2,000 per year that while not tax deductible, do grow tax free, and earnings remain tax free for qualified education expenses that include secondary schools (private, religious, etc.). The range of investments is generally larger than that offered by 529 plans which are run by mutual fund companies. Any IRA custodian can also offer Coverdell ESA's and companies like Shwab and Vanguard offer these accounts. With a self directed account you can choose from stocks and bonds in addition to mutual funds, so your portfolio can be managed with greater flexibility.

To make contributions a couple's adjusted gross income must not exceed $220,000, or $110,000 if you are single. To qualify for tax free withdrawals the money must be spent for qualified education expenses before the beneficiary turn 30 years old, however you can change the beneficiary to another family member once per year. The beneficiary must be under age 18 unless the beneficiary is a special needs child. Contributions from all donors cannot exceed the $2,000 per year cap.

With the rising cost of educating our children outstripping the general rate of inflation saving for college becomes more and more imperative. Coverdell ESA's are another account you should consider.