College Savings Accounts:
Coverdell Education Savings Account

There is more focus on college educations and college savings accounts than ever before. Part of this is due to the changing nature of the world and the need to have a broader education. Part of this is also due to changes in the economy - both because people are finding saving money for college harder with limited budgets and because financial aid is harder to come by.

college savings accounts

Still, parents want to help their children have opportunities they may not have had. Saving money for college and savings accounts for kids are solid ways parents can help prepare for their children’s future. College savings accounts come in several varieties that can fit both into your family budget as well as into your overall college savings plan. One of the most popular is the Coverdell Education Savings Account.

In the past, the Education Individual Retirement Account (Educational IRA) was limited to having $500 added to the account each year. That $500 didn't make much of a dent in what families needed to save for college. In 2002, the Education IRA got a makeover and became the the Coverdell Education Savings Account (ESA), and the contribution limit was raised to $2,000 per year.

Any parent, grandparent, or other adult can set up an ESA and designate a child seventeen or younger as the beneficiary. Contributions can be made each year up to the $2,000 limit.

These contributions are not tax-deductible; however, as long as withdrawals are made to pay eligible school charges (tuition, books, etc.) they can be withdrawn without being taxed. The money can be used not only for college but also for other school expenses for kids in grades K-12, such as private school tuition.

What are some of the other benefits of saving money for college for a child you know?

  • You can add money to the ESA and receive credit for doing so up to the date you file income taxes in April.
  • Instead of having a cut off of the child’s eighteenth birthday, contributions for children with special needs can be made past their eighteenth birthday.
  • Any adult can add money to a child’s account as long as the total contributions for the year do not exceed $2,000. This makes a great gift idea, too. If money over $2,000 is placed into the account, there is a six percent excess contribution tax charged even if the funds come from different people.
  • You can start a Coverdell account and a state-sponsored college tuition program account for the same child.
  • ESA college savings accounts can be opened at any financial institution that offers IRA accounts. The contributions can also be made in any of the following – stocks, bonds, mutual funds, and certificates of deposit – as long as the contribution does not exceed $2,000 per year.

There are some downsides, too, that need to be weighed as part of your overall saving money for college plan.

  • There can be high maintenance fees. There are plenty of good plans with lower fees that won't wipe out any savings or earnings in your account. Check out this list for some great choices.
  • If kids don't use the money for education, it will evenutally be distributed to them as beneficiaries. This is different than 529 plans where the money saved stays with the owner (parent or guardian typically) if it is not used. The full use of the funds must occur by the time the child/beneficiary turns 30 so there is some time to use the funds.
  • It can be a challenge to navigate savings in the various college savings account options as well as with other programs such as the Hope credit and Lifetime Learning credit.

Don't let any of this overwhelm you. The important part is taking that first step to start a college savings account. That may be as simple as opening a regular savings account for kids and starting to put $10 a month into it. While that money is adding up, you can do some additional research into the various college savings account options, including prepaid college tuition and 529 plans.

Return from College Savings Accounts: Coverdell ESA to Family Money Basics

Return to home page