5 Tips to Educate Yourself About Education Savings Accounts

People who want to save for a child's college education have a wide array of choices. Among these are Coverdell Education Saving Accounts (ESAs). One advantage ESAs offer is that they usually give you more investment choices than most other college savings vehicles. Another plus: Withdrawals from ESAs are not limited to college expenses. You can use them much earlier, including to pay for elementary or high school tuition.

Here are five tips to consider when deciding whether ESAs make sense for your situation. 

Organizations, such as corporations, can also contribute to ESAs and are not subject to any income limits. For more information, see IRS Publication 970.

One advantage ESAs offer is
that they usually give you more
investment choices than most
other college savings vehicles.

  1. They give you plenty of investment options.    
    Formerly known as Education IRAs, ESAs are a tax-advantaged way to pay for college. Unlike 529 plans, your investment options are virtually limitless. Except for investing in life insurance contracts, you can buy and sell what you want, whenever you want. Also, you can set them up at almost any brokerage firm, mutual-fund company or other financial institution.
  2. They offer federal tax advantages.  
    As with 529 plans, you cannot deduct from your income taxes the money you contribute to an ESA—but earnings in ESAs can grow on a tax-deferred basis, and withdrawals that are used for qualified education expenses are tax-free.
  3. Some non-college education expenses are covered.  
    A key advantage that ESAs have over other tax-advantaged saving options is that you can make tax-free withdrawals to pay for private elementary and high school expenses, as well as post-secondary school expenses. So if a private school is in your child's future, one option you might want to consider is saving for that expense in an ESA and using a 529 plan for college.
  4. There are contribution limits.
    ESAs have two annual contribution limits for individuals:
    • You can give up to $2,000 to any one beneficiary if your modified adjusted gross income is $95,000 or less for a single filer—or $190,000 or less for joint filers. The amount you can contribute phases out if your modified adjusted gross income is between $95,001 and $110,000 (single filer) and $190,001 and $220,000 (joint filer). 
    • The total of all contributions to all ESAs set up for one beneficiary cannot exceed $2,000 in a single year. If other family members set up ESAs for your child, you need to check with them to make sure this annual contribution limit is not exceeded. 
  5. ESAs come with costs.   
    You will pay fees, charges and expenses, which will vary depending on the investments you choose and the institution with which you open an ESA. Remember, however, that because of the fairly low contribution limits, even small annual fees or expenses could make a big difference in the value of your investment over time.

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