||Ask Dr. Don
Coverdell education savings
Dear Dr. Don,
Where can I get the best rate for an education IRA?
Education IRAs have been renamed Coverdell Education Savings Accounts
(CESA), and the contribution limits have been increased to $2,000
per beneficiary in the 2002 tax year. Other changes include:
- The income phase-out increases for joint filers.
- Qualified education expenses include elementary
and secondary school expenses.
- Age limits do not apply to "special needs"
- Contributions may be made until April 15 of the
- Tax-free distributions can be used for special-needs
There's a lot of flexibility in how you set up a CESA.
You can set a CESA up as a brokerage account, a bank account or
directly with a mutual fund company. Keep an eye on the account's
fees and expenses because they can really influence the returns
on the investment.
Asking for the "best rate" on a CESA suggests
that you're looking for a CD or bond investment because stocks or
stock mutual funds won't have contractual interest payments.
If you want a guaranteed rate of return with no risk
to principal, you should invest the money in U.S. Treasury securities
or insured certificates of deposit. The CD rates offered for a CESA
should be comparable to the rates offered on an IRA CD, and you
can review IRA CD rates using Bankrate's IRA
The longer you have until the beneficiary needs the
money for qualified college expenses, the more risk you can take
in how you invest the money, and an investment in a stock mutual
fund may be more appropriate.
If you haven't made a contribution to a CESA for the
2001 tax year, it's too late to make one now. CESA accounts for
the 2001 tax year had to be funded by Dec. 31, 2001. In 2002 and
later tax years, you'll have until your tax filing deadline to contribute
to a CESA.
There are income restrictions on who can contribute
to CESA accounts, and the contribution totals are per beneficiary.
The contribution limit is phased out at income levels between $95,000
and $110,000 for contributors who file individual (single) returns
and from $190,000 and $220,000 for contributors filing joint returns.
A CESA can impact the beneficiary's ability to qualify
for financial aid. If you expect students to qualify for financial
aid, it may not be in their best interest to open a CESA for them.
It also requires some planning to use the account
in conjunction with Hope or Lifetime Learning tax credits. That's
because education expenses paid with monies from a CESA can't also
be used to qualify for the Hope or Lifetime Learning Credit.
The three main choices for tax advantaged investing
for college savings include CESA,
529 prepaid tuition or college savings plans, and the Education
Bond program offered by the U.S. Treasury.
Which program is right for you depends on how much
you plan on contributing, how long until the beneficiary will start
to use the money, your income level, and your attitude toward risk
when investing. Take a look at all three options before deciding
where you want to invest.
-- Posted: Jan. 15, 2002