A:

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 And, as long as withdrawals are used for qualified educational expenses, the earnings can be withdrawn tax-free.

RELATED FAQS
  1. What are the risks involved in a banker's acceptance?

    Learn about the different kinds of college savings accounts, how they can benefit a college saver and how to open these savings ... Read Answer >>
  2. Which of the following accounts does ERISA cover?

    A. IRA B. State employee pension planC. Corporate defined-benefit planD. Coverdell savings account Answer: CThe correct answer ... Read Answer >>
  3. What options do I have to save for my child's education?

    There are numerous options available to invest savings for a child's education: State-sponsored "529" college savings plans: ... Read Answer >>
  4. What is the best way to save for private school expenses? A 529 plan, a Coverdell ...

    If the goal is to put the money in the plan towards private school expenses, then the Coverdell Education Savings Account ... Read Answer >>
Related Articles
  1. Financial Advisor

    Why Coverdell ESAs May Trump 529 Plans

    Coverdell ESAs still trail 529 plans in popularity by a wide margin due to their low contribution limits. But these accounts can be a viable alternative.
  2. Taxes

    Tax-Smart Ways To Help Your Kids/Grandkids Pay For College

    Learn about plans and accounts that allow you to efficiently save for your child or grandchild’s education while shielding the savings from the IRS as much as possible.
  3. Retirement

    4 Smart 529 Plan Alternatives to Consider

    Learn about some alternatives to the popular college-saving 529 plan that may also make sense, such as prepaid tuition plans and Coverdell accounts.
  4. Taxes

    Clearing Up Tax Confusion For College Savings Accounts

    Put your kids through school without being hounded by the tax man.
  5. Personal Finance

    Save for College With a 529 or Coverdell ESA Plan

    Two options for saving for college are the 529 plan and the Coverdell Education Savings Plan.
  6. 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.
  7. Personal Finance

    5 Ways to Save and Pay for College

    College tuition is expensive. Here are five ways to save and pay for college.
  8. Personal Finance

    Saving for College? Be Educated About Your Options

    When it comes to saving for college, there are better places for your money than a savings account.
  9. Personal Finance

    Saving for College: 7 Options to Consider

    There are many options choose from when you're looking for the right educational savings plan for your child.
RELATED TERMS
  1. Education IRA

    A savings plan for higher education. Parents and guardians are ...
  2. Form 1099-Q

    An IRS form that an individual who receives distributions from ...
  3. Lifetime Learning Credit

    A provision of the U.S. federal income tax code that lets parents ...
  4. Gift Splitting

    A taxation rule that allows a married couple to split a gift's ...
  5. Gift Tax

    A federal tax applied to an individual giving anything of value ...
  6. Gift In Trust

    An indirect bequest of assets to a beneficiary by means of a ...
Trading Center