college

Coverdell accounts

Selecting an account home

Okay, you've determined that a Coverdell Education Savings Account is a worthwhile component of your child's overall educational savings plan. So where do you put the money?

Any financial institution (a bank, investment company, brokerage, etc.) that handles traditional IRAs can help you set up and manage a Coverdell account. You can put your contributions into any qualifying investment vehicle -- stocks, bonds, mutual funds, certificates of deposit -- offered at the institution that will serve as the account's custodian.

If you want to diversify, you can split the money up into several investments. There's no limit on the number of Coverdell accounts that you can establish for a child. The only limit is on the total contributions: You can't put more than $2,000 a year away for the student, regardless of how many accounts he or she has. Just be sure that management fees for multiple accounts don't eat into your overall savings return.

Unused Coverdell money

If Junior decides college is not really for him, what happens to any unused education IRA money diligently contributed all these years? Then the student pays at age 30, withdrawing any balance in the account within 30 days of the 30th birthday, and owing tax on the earnings plus a 10 percent penalty.

The IRS, however, offers a way out of this taxable situation. The student can roll over the full balance to another Coverdell plan for another family member. This could be a younger sibling, niece, nephew or even his own son or daughter.

Coverdell at a Glance
ProsCons
  • $2,000 contribution from numerous sources
  • Considered parental asset, not child's
  • Contributions grow tax free
  • Contributions withdrawn tax free as long as they are spent on accepted school expenses
  • Money can be used for elementary or secondary school
  • Contributions allowed to Coverdell and state savings plan simultaneously
  • You control the investment vehicle
  • $2,000 limit to contributions in a single year from all sources
  • Contributions are not tax deductible
  • Annual income limits for contributors
  • Unused money must be withdrawn by beneficiary within 30 days of 30th birthday and tax and penalty must be paid

 

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