This is the first part of a four-part series on college savings plans.
Relying on financial aid for your children’s college funding can be risky. Yes, apply for grants and loans when the time arrives. However, since financial aid is not guaranteed, many people have turned to Coverdell Education Savings Accounts to help assure that the college funding dollars are there when their children are ready for college.
Coverdell Education Savings Accounts (ESAs), formerly known as Education IRAs, permit contributions of up to $2,000 each year in the name of a qualified beneficiary under age 18. Anybody can make the contribution (parent, grandparent, favorite uncle, etc.) provided the total does not exceed $2,000 per child per year.
Contributions are not tax-deductible. However, ESAs feature tax-free accumulation AND tax-free distributions if the money is used for education purposes. The accounts can be used to cover elementary and secondary education expenses, not just post-high school costs.
Qualified education expenses include tuition, fees, books, supplies, equipment, and certain room and board expenses. There are income limits associated with these accounts, but if you fall within the income guidelines, you can use a Coverdell to start setting aside money now to help ease the financial burden that you know is on the way.
Example: Jan and Peter want to do help with college funding for their two grandchildren, Maddox and Athena, who are both under age three. With the blessing (and appreciation) of the children's parents, Jan and Peter contribute $4,000 each year ($2,000 for each grandchild) into their Coverdell ESAs. By the time their grandchildren are ready for college, a good chunk of the cost should be pre-paid.
How much can you accumulate? If you start early enough, the totals can look pretty respectable. You just might be able to cover the entire cost.
Remember, there are income limits and restrictions. However, even if you do not qualify, others can still make contributions in your child’s name. Also, it is possible under current law to gift the contribution to the child, who then makes the contribution in his or her own name. This makes a Coverdell ESA an excellent gifting vehicle for grandparents and other relatives.
The bottom line: Take every opportunity to apply for financial aid to supplement other college funding strategies. At the same time, consider the benefits of establishing Coverdell Education Savings Accounts.
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