 |
 |
 |
 |
 |
Coverdell Education Savings Accounts (ESAs)
Formerly known as the Education IRA, in 2002, it was re-named the Coverdell Education Savings Account and has become a common college savings vehicle for many people, including families that wish to save for elementary and secondary school expenses as certain K-12 expenses were added to the list of qualified expenses. In fact, some people who like the 529 plan, may still decide to contribute the first $2,000 of savings for each child into a Coverdell ESA plan for potential elementary or secondary school expenses that may arise.
As with the 529 plans, proceeds within a Coverdell ESA may be invested in mutual funds, but can also include stocks or ETF's. Growth within the Coverdell ESA is tax deferred and as long as the proceeds are used for qualified elementary, secondary, or post-secondary educational expenses, withdrawals are free from federal tax consequences.
The advantages of the Coverdell ESA plan include the flexibility of investment choices, the ability to use proceeds for elementary and secondary school expenses, and the tax deferred and tax free growth potential if money is used for qualified expenses. A couple of drawbacks to the Coverdell ESA plans is that any proceeds not used for qualified educational expenses may be subject to federal income tax plus a 10% penalty. In addition, income limits, contribution limits and beneficiary age limits may not be as beneficial as those within a 529 Plan. Please see this College Savings Comparison Chart to view the differences between a Coverdell ESA plan and other children's savings options. Please also consult your tax professional for tax advice related to college savings plans.
