By Reyna Gobel
Many people start a college savings fund for their newborn children. However, you may also decide you want to send your son or daughter to private school at some point during his or her elementary or high school years. Luckily there is a tax-advantaged fund that covers both, the Coverdell Education Savings Account (ESA).
The Coverdell Education Savings Account allows individuals to deposit up to $2,000 per year in an educational savings account for an eligible beneficiary (child) without being taxed on earnings from interest, dividends, appreciation, etc. – as long as the child uses the funds before the age of 30 for qualified educational expenses. The account must be started and all contributions made before the child is 18.
Note: The age 18 and age 30 limitations are waived if the beneficiary has special needs. This waiver allows the ESA to be funded after age 18 and allows the assets to remain in the account after age 30.
For example, suppose you deposit $2,000 at the beginning of the year into an ESA. Your account earns 4%, or $80. You paid taxes on the $2,000 via your paycheck. The child will not have to pay taxes on the $80 earned, unlike a regular savings or investment account.
In this tutorial, you'll learn how to open and contribute to an ESA and how to avoid tax penalties.
