By Kristina Ludwig, Fall 2014 Student Intern
Coverdell Education Savings Accounts can generally be set up at almost any financial institution. Unlike 529 plans, Education Savings Accounts allow a much broader range of investments (except for life insurance contracts).
They have two annual contribution limits for individuals. First, you can give up to two thousand dollars to any one beneficiary if, as a single person, your modified adjusted gross income is $95,000 or less (if your filing status is Married Filing Jointly, your modified adjusted gross income must be $190,000 or less). However, if your modified AGI is more than $110,000 (or $220,000, if married filing jointly), then you cannot make an Education Savings Account contribution that year (but if your modified AGI falls between the two numbers, then you are allowed to make a reduced contribution, which can be calculated via the formula on FINRA’s website here). Secondly, total annual contributions for one beneficiary cannot exceed two thousand dollars. No doubling-down on contributions by getting Grandmama involved.
But, even with these annual limitations, if you invest $2,000 per year from when your child is born to its 18th birthday, you will have $61,000 in college savings (assuming an annual yield of six percent).
Furthermore, Education Savings Accounts, while not tax deductible, are tax-deferred; unless the withdrawals are used for qualified education expenses, in which case they are tax-free. Qualified education expenses are those expenses required for enrollment or attendance of an eligible educational institution, which includes elementary and secondary education as well as postsecondary education. Postsecondary qualified education expenses also cover books, supplies, equipment and expenses for room and board (for students enrolled at least half-time) in addition to tuition and fees.
Since Education Savings Accounts enable tax-free withdrawals to pay for elementary and high school expenses, FINRA suggests that, if you plan to send your children to private school, save for that expense with an ESA and use a 529 plan to save for college.