Back-to-school season is here, and back-to-school expenses. Whether your child is in kindergarten or college, you are going to spend money on school supplies, books and tuition — and the charges can multiply quickly. Save some money on these expenses by opening up a Coverdell Education Savings Account at a bank, brokerage or other financial institution.
Previously known as Education IRAs, Coverdell accounts enable you to invest up to $2,000 a year for your child's educational expenses, and the money grows tax-free. Neither the contribution nor the interest are taxed when you withdraw funds, as long as the money is used for qualifying educational purposes.
Unlike the similar 529 college savings account, the money in your Coverdell is not limited to spending on higher education; you can use it for tuition to any K-12 private school. Other educational expenses such as books, supplies, transportation, tutoring and even computers and Internet service also qualify.
However, there are income limitations. To open a Coverdell account, you must have a modified gross income of less than $110,000 if you are a single and less than $220,000 if you file your taxes jointly. Contributions can be made only for beneficiaries younger than 18 and the money must be used by the time the child reaches 30. After that, the earnings are taxed as ordinary income and will incur a 10% penalty.
Open a Coverdell account at any bank or at a mutual fund or brokerage firm. Be sure to ask about commission costs and other fees that may apply. Just be aware that Coverdell accounts may affect your student's financial-aid eligibility — the accounts are treated as students' assets.
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