Coverdell Education Savings Accounts
Always Plan Ahead
Educational savings accounts or ESAs have become de rigueur among college savings plans, ploys and tools. While 529 plans are widely marketed by every state in the nation as the premier college savings tool, the Coverdell Education Savings Accounts remain a bit more elusive, misunderstood and are frankly just not very well marketed.
The Horse Before the Cart Account
What makes the Coverdell distinctive, from its 529 brethren, is its ability to help families save for elementary, middle and high school in addition to the college factor. This is perhaps one of the biggest perks of the Coverdell. When everyone else has gotten stuck in the college saving milieu, there is a government sanctioned savings account that will help those who are still trying to balance the family books for their kids’ primary education.
How the Coverdell ESA Works
Well, the purpose of a savings account is to put money away for a rainy day. The Coverdell works like any other savings account, but your money is not subject to Federal taxation as long as it’s used for educational expenses. A lending institution manages your account for you just like any other account and makes sure you understand the nuances of the program. There are maximum contributions, a cut off for any and all contributions and a use-by date.
Any financial investment firm and most banks are able to open your Coverdell ESA for you and apply your contributions in a manner similar to an IRA.
Many financial gurus liken the Coverdell ESA to an IRA in its characteristics. You have an annual maximum contribution before you are penalized. Currently the maximum you can apply to the Coverdell is $2,000, which according to past Coverdell history is extremely generous. Be aware that this can change with the vicissitudes of Federal legislation. What if you go over your limit? You are hit with a fee, of course; it’s about 6 percent.
What can be confusing is that other people can contribute to the account, like grandparents or friends, which means you really want to make sure you stay on top of any contributions outside your own since the penalties apply to the total contributions, not who made them.
While your maximum contribution is $2,000 per year, you cannot contribute any more funds after your child, usually referred to as the account benefactor, is 18. With this in mind you better save wisely and make a plan for spending, especially if you are using the ESA for primary and secondary educational expenses as well as planning on it serving your college needs, as well.
Life of the Coverdell ESA
The ESA lifespan lasts up until your child turns 30. If at this point there are leftover funds in the account or if none of it was used for college, they all revert to your child, who essentially is the owner of the account. So whatever you contribute you will not get back. What’s more is that whatever funds are leftover will be subject to Federal tax laws once they are withdrawn.
Getting Past the Limits
So you’re concerned about the limits imposed by the Coverdell. As far as having enough money, tax-free for college, you can also contribute to a 529 Savings Plan simultaneously. This way you don’t have to sweat the maximum contribution rate or struggle to make sure you have enough saved in your Coverdell to cover college expenses, too. Remember making a solid college savings plan makes all the sense in the world. Make sure you understand the pros and cons of any of the college savings plans. They can be fantastic programs if you know how to use them to your advantage.