The Coverdell ESA is a good place to begin once you start thinking about stashing some cash for your child’s college education. As of 2015, it allows you to contribute $2,000 a year into the account for beneficiaries under the age of 18. The earnings in the account are tax-free as long as you used them for qualified expenses. Keep in mind, just like any investment, you should be aware of the current tax laws. In 2015, there was a phase out for incomes over $110,000. You can however, gift the money to the child, who will probably have income far less than you, and let them open it in their own name.
Qualified expenses aren’t just for college, you can use for K-12 school and may even apply the costs towards school related items such as transportation, uniforms, tutoring, books and computers. Qualified expenses, contribution limits and allowable school could change at any time if the government decides to restrict activities so be sure to research thoroughly before you make a decision.
Proceeds from a Coverdell ESA must be used by the time the recipient is 30 years old. Your contribution goes into the account that will be passed to your child even if they do not use it college. You can’t ask the government for the money back like you can with some 529 plans. Be prepared to give up this level of control. For more control and flexibility in a college savings plan, read about state prepaid tuition and college savings plans.
Coverdell ESA are an investment account and can be opened through banks, credit unions, brokerage firms, and mutual funds. Be sure to pay attention to any associated broker fees that may be attached to it so that you can make a wise decision on which provider to work with.
- Education IRA
- State Prepaid Tuition Plan
- State College Savings Plan