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 And, as long as withdrawals are used for qualified educational expenses, the earnings can be withdrawn tax-free.

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RELATED TERMS
  1. Education IRA

    A savings plan for higher education. Parents and guardians are ...
  2. Gift Tax

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

    An indirect bequest of assets to a beneficiary by means of a ...
  4. Coverdell Education Savings Account - ESA

    A tax-deferred trust account created by the U.S. government to ...
  5. Gift

    Property, money or assets that one person transfers to another ...
  6. Annual Exclusion

    The amount of money that may be transferred by gift from one ...
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