The Coverdell Education Savings Account - Is it Right For You?

Most parents are dealing with daily battles from getting homework into backpacks to packing a healthy lunch, still long term concerns like saving for college tuition and fees are lingering too. College tuitions and fees continue to rise even as the economy is in a downturn. So what are your college savings options? Are Coverdell Education Savings Accounts a good option?

They certainly can be. It simply depends.

The 411 on Coverdell Savings Accounts

Coverdell Education Savings Accounts, formerly known as the Education IRA, was created in 2002 and named after the late U.S. Senator Paul Coverdell. It was designed to help parents achieve higher education savings.

The highlights of a Coverdell Education Savings Account:

Contributions are not tax deductible but are withdrawn tax-free when used for education.

Offers a tax shelter for education savings.

There is no tax owed on the capital gains provided it is used for education regardless of how large the fund grows.

Like 529 college savings plans, this college savings account is not considered funds of the student when he or she applies for financial aid so a Coverdell account won't work against financial aid applications.

It must be used by the time a child turns 30 years of age, but can be transferred to another family member as long as the funds are used for education.

This account offers greater investment flexibility. Parents or guardians can invest this fund in practically any investment including common stocks of a start up company, preferred stock in a large, Blue Chip business, a money market account or mutual funds.

These type of plans are the way the funds can be used. Many college savings accounts are limited to higher education expenses. But this savings account can be used for any educational expense at any level including funds for elementary school or high school tuition at a private institution in addition to tuition and fees at a college or university.

Another advantage is that this account can be set up at most financial institutions including banks, brokerage houses and mutual fund companies.

What are the limitations of the Coverdell Education Savings Accounts?

The biggest limitation of the Coverdell Education Savings Account, compared to the

Section 529, is an annual limit of $2,000 based on current tax laws, which of course could change at any time. This is lower than the contributions allowed in a Section 529 and other college savings plans.

Is a Coverdell Education Saving Account a good option?

It can certainly be a good tool for saving for college or even private school tuition. In fact, it is ideal for parents who may be considering private school before college.

By taking advantage of this type of educational savings plan, parents can set aside a small amount, although nothing to sneeze at, of $2,000 each year to help pay for educational expenses.

The biggest disadvantage of this college savings account of course, is the $2,000 annual limit on contributions. This means that for many families, a Coverdell Education Savings Account can't be the only education savings plan if they don't want to borrow money for higher education expenses.

Always assess current laws. Participation in this savings account has limits based on income levels for both single filers and married filers.

Overall, a Coverdell Education Savings Account alone may not cover all expenses but it is certainly a flexible option and a good starting place for saving for education expenses, whether private school or college tuition.