A parent would choose to set up a Coverdell Education Savings Account for a child in order to save for college expenses AND:
a. avoid gift taxes.
b. take a tax deduction on the contribution.
c. enjoy tax-free investment earnings.
d. enjoy tax-deferred investment earnings.
The correct answer is “c.” There is no tax deduction available for contributing to a Coverdell. While the contribution is considered a gift, the annual Coverdell contribution limit of $2,000 is well under the annual gift tax exclusion of $13,000. And, as long as withdrawals are used for qualified educational expenses, the earnings can be withdrawn tax-free.
