What?! There are Education IRA’s??

Now known as the Coverdell ESA, an education IRA, according to Investopedia.com, is “A savings plan for higher education. Parents and guardians are allowed to make nondeductible contributions to an education IRA for a child under the age of 18.” Getting an attorney to help you set one up could end up saving you tax dollars, as well as help you save up for your child’s education.

Here are some fun facts about the wonderful Coverdell ESA:

• Unlike retirement IRA’s, contributions must be made before December 31
• You can put up to $2,000 into the fund each year. (max total 18yrs x $2,000 = $36,000)
• A healthy plan for contributions could consist of $166/month installments, totaling $1992/year.
• If you set it up for your child, even he/she can contribute to the fund. A great way to teach about saving.
• You can contribute to multiple Coverdell ESA funds, but the contribution limit remains at $2,000.
• There are a few limits to who can contribute, but it depends on their modified adjusted gross income. $110,000 (single) and $220,000 (joint).
• The best part! The earnings on your contributions will never be taxed.  Unfortunately the contributions themselves are not deductible, but the beneficiary avoids the capital gains tax and other taxes when withdrawing funds (as long as the money is used for qualified purposes. e.g. tuition, fees, books, limited housing, and school supplies).
• The funds can be used for virtually any public, private or religious primary, secondary or post-secondary school tuition, fees, etc. So you can save money early to send your kid to a private school if you want.
• Careful when withdrawing fund for non-qualified expenses, because you’ll be taxed and maybe even penalized. Ouch!

Consensus: The Coverdell ESA has come a long way as far as allowable contributions (it used to be $500/yr), and it is a great way of investing in your or your child’s future. The fund is a little limited, especially if you end up paying $30,000 tuition, but it can save you tax dollars in the end while safe-guarding quite a bit of education money.

For more information see this link and contact your attorney to set one up.

More educational funding options to ask about (I’ll also write about them later):

1. The American Opportunity Credit
2. The Hope Credit
3. The Lifetime Learning Credit
4. Enhanced benefits for 529 college savings plans
5. Tuition and fees deduction
6. Qualified Tuition Programs (QTPs)