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 And, as long as withdrawals are used for qualified educational expenses, the earnings can be withdrawn tax-free.

  1. Can I contribute to both a 529 plan and a Coverdell education savings account?

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  2. Which of the following accounts does ERISA cover?

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  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 >>
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