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Saving for School the Coverdell Way
The Coverdell Education Savings Account is a tax-privileged savings vehicle that replaces and improves upon the old Education IRA (individual retirement account).
Contributions are limited to $2,000 a year per beneficiary, which amounts to about $166 a month. Bit by bit, those savings can accumulate into a tidy sum. For most families, $2,000 a year is enough...if you start saving early.
The chief feature of the Coverdell account is that it shelters investment growth from the tax collector. That means that savings set aside in such accounts--plus the earnings they make--are fully available for qualified school bills.
Besides protecting earnings from taxes, Coverdell accounts offer investment flexibility, transferability, and tax-free withdrawals to cover education costs such as books, tuition, and room and board. And they're not just for college kids.
You can create a Coverdell account for any school, even grade school and high school. They're also available for students with special needs, regardless of their age.
Coverdell contributions must stop when the child reaches 18, and the account must be spent on schooling by the time the beneficiary reaches 30, unless the student has special needs. Otherwise, the earnings could be subject to income taxes as well as a 10% penalty.
However, unused portions of the Coverdell account may be transferred to a relative--a sibling, niece, nephew, even cousin--to keep the education savings in the family and avoid tax penalties.
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