Education Savings Accounts

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Education Savings Accounts

The Coverdell education savings account (formerly known as the education IRA) is a creation of the Taxpayer Relief Act of 1997. As the name implies, it’s tailor-made for college savings.

Here are the answers to some college-savings-plan questions:

• How much can I contribute to the plan? You can usually contribute up to $2,000 per year to a Coverdell account, possibly less depending on your income. A child can only be "funded" by $2,000 per year, though. So you and Grandma cannot each invest $2,000 in a Coverdell for your son each year.
• What are the plan’s investment options? You can invest the Coverdell in just about anything.
• What are the taxes? Although you pay taxes on contributions, withdrawals are tax-free.
• Who controls the money? The recipient (the child going to college) technically controls how the money is spent, but he or she can only use it for education. If he/she doesn’t use the money, you can transfer the account to a relative who will use the money for education.
• Can the money in the plan be used for anything other than education? Money in the account can only be used for education.

The Coverdell education savings account is a good choice for anyone who qualifies. However, saving just $2,000 per year for college may not get your kid very far. As a result, the Coverdell account should only be one part of your college savings plan.