Coverdell Education Savings Plans

Many investors regard college savings as a very important part of their overall personal financial investment strategy among other strategies such as amortizing a premium. Over the long term, systematic contribution to selected educational savings accounts can help to significantly defray the cost of tuition when it finally comes time to move your child on campus. At the same time, these excellent investment opportunities also afford certain tax advantages that make than even more attractive to many people. Coverdell educational savings plans (ESAs) are one such type of account set aside for educational savings. They have some unique features and advantages that every investor interested should know about before making the choice to go with a Coverdell ESA.

Basic Overview of Coverdell ESAs

Coverdell educational savings accounts, which were formerly called Educational IRAs, help families in their efforts to save money for educational expenses. They have some unique features that set them apart from other investment options such as market linked CDs in this broad arena. For example, the funds contributed to an ESA are available for use in paying for both elementary and secondary school expenses as well as post secondary higher education costs. This is in stark contrast with many other options specifically set aside for post secondary education only. Although the level of schooling for which they are intended is not limited, there is a stipulation with Coverdells as far as accreditation is concerned. Anyone who wishes to use these funds for educational expenses must make sure that the school they intend to send their child to is fully accredited, because these funds can only be used at accredited schools, no matter the educational level.

A Coverdell education savings plan can be established on behalf of anyone under age of 18. Anybody is free to contribute to these accounts; they are not limited to parents or guardians of the beneficiary only. However, no matter how many people are interested in contributing, the annual limit is $2,000 as of tax year 2010. Only tax payers whose income falls under a certain threshold may contribute. These limits are regularly adjusted for the cost of living, so it is good to check with your financial advisor regarding current limits to see how your income stacks up.

Benefits of Coverdell Savings Plans

The benefits to opting for Coverdell educational savings plans are numerous. One of the largest and most important benefits is that this investment vehicle allows your contributions to grow free of taxes. Once you place money into these accounts, all the income that money generates is tax exempt. As long as the money is eventually used to pay for educational expenses, there will never be taxes levied on these funds once they are in the account and at their withdrawal come college time for the beneficiary. Withdrawals for other uses are permitted, but they are subject to income taxes as is any other income.

Important Considerations for ESA Investors

There are some other important things for investors to think about as they ponder the possibility of choosing a Coverdell plan for their college savings. One of these key points involves the age of the beneficiary. Any contributions made to these accounts must cease once the named beneficiary reaches the age of 18. Annual contributions must be made by no later than April 15 of the following year after that particular birthday.

Contributions to ESAs are not tax deductible, and these contributions can only be made by those whose income falls below a certain maximum annual level. Funds in these accounts must be used by the time the beneficiary reaches age 30, or rolled over to benefit someone else.

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