Coverdell Education Accounts
Coverdell education accounts, also known as CESA plans or an Education IRA, are useful investment tools for parents of college-bound children. These accounts are set up solely for the purpose of paying the college expenses of the beneficiary. Coverdell accounts have a variety of advantages and tax benefits as well.
The advantages of a Coverdell account include the following:
- Earnings are tax free if they are used for qualified education expenses.
- Earnings can also be used for elementary and high school expenses.
- Coverdell accounts can be owned either by the parent or the student.
- Accounts have low impact on eligibility for need-based financial aid if it is owned by the parent or a dependent student.
- Accounts can be transferred to other family members.
Disadvantages include:
- Maximum contribution limit of $2,000 per year per beneficiary. This limitation can be bypassed by using a UGMA or UTMA.
- Contributions can be made only until the beneficiary reaches age 18.
- Funds in the account must be used by the time the beneficiary reaches age 30 or earnings will be subject to tax and penalties.
You may open a Coverdell account any most banks or brokerages. However, despite the the advantage of these accounts, many financial advisors feel that 529 plans are still a superior investment strategy for education expenses.
