A:

If the goal is to put the money in the plan towards private school expenses, then the Coverdell Education Savings Account (ESA) appears to be the better choice, because the earnings are tax-deferred and will be tax-free if distributions are used for eligible education expenses, which includes expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Private schools are considered eligible education institutions for an ESA, but eligible institutions for the 529 plan are limited to college, university, vocational school, or other post-secondary educational institutions eligible to participate in a student aid program administered by the Department of Education.

Bear in mind that the maximum amount that may be contributed to an ESA on behalf of any designated beneficiary is $2,000 per year.

As for putting the money in mutual funds, earnings on the mutual funds may be taxed in the year earned.

Other options are explained in IRS publication 970, available at www.irs.gov. To locate this publication, enter ‘970' in the second search bar and click on the ‘enter' button.

This question was answered by Denise Appleby
(Contact Denise)

RELATED FAQS
  1. A parent would choose to set up a Coverdell Education Savings Account for a child ...

    A parent would choose to set up a Coverdell Education Savings Account for a child in order to save for college expenses AND: ... Read Answer >>
  2. What is the Education Savings Bond Program?

    Learn about the education savings bond program and find out if you are eligible to use your savings bonds for payments toward ... Read Answer >>
  3. Can my IRA be used for college tuition?

    Find out how to use your IRA retirement savings to pay for your college tuition, including what institutions and expenses ... Read Answer >>
Related Articles
  1. Retirement

    Don't Forget The Kids: Save For Their Education And Retirement

    Retirement and education financing are the two most important planning items for taxpayers.
  2. Managing Wealth

    Education Savings Account Tutorial

    This comprehensive guide goes through what an Education Savings Plan is and how to set one up, contribute to it and withdraw from it.
  3. Managing Wealth

    Choosing The Right 529 Education Savings Plan

    Before you fund one of these education-savings vehicles, be sure you know their differences.
  4. Personal Finance

    529 Plan or Coverdell? How to Choose College Savings Plans

    There are two options when it comes to tax-free college savings plans: a 529 plan or a Coverdell ESA. Here's how they compare.
  5. Personal Finance

    529 Plans: Your Most Pressing Questions Answered

    When parents start preparing for college costs, here are the most commonly asked questions about 529 plans.
  6. Personal Finance

    Advising FAs: Explaining College Savings Accounts to Clients

    There are several types of savings accounts designed for higher education available today. The right one for you will depend upon factors such as your tax bracket, time horizon, investment objectives ...
  7. Managing Wealth

    Investing In Your Child's Education

    Overwhelmed by increasing tuition costs for your kids? The U.S. government can help.
  8. Investing

    Spoil Your Grandkids, Cut Your Tax Bill

    Helping your grandchildren save for college is a way to spoil them and reap some benefits yourself.
RELATED TERMS
  1. Coverdell Education Savings Account - ESA

    A tax-deferred trust account created by the U.S. government to ...
  2. Lifetime Learning Credit

    A provision of the U.S. federal income tax code that lets parents ...
  3. 529 Plan

    529 is a category of plans that provide tax advantages when saving ...
  4. Education Credit

    A type of tax credit available to students of a post-secondary ...
  5. Registered Education Savings Plan - RESP

    A savings plan sponsored by the Canadian government that encourages ...
  6. Federal Supplemental Educational Opportunity Grant - FSEOG

    A program that provides funds for undergraduate students who ...
Hot Definitions
  1. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  2. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  5. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center