If you have a 529 plan, you may consider using a Coverdell Education Savings Account (ESA) as well. It supports a 529 perfectly and helps you to save more for the educational expenses of your child, from kindergarten to college. It is an ideal tax-saving tool for parents, as their savings can grow tax-deferred. Also, there are no taxes charged at the time of withdrawal.
Only those whose adjusted gross income is less than $110,000 ($220,000 for those filing jointly) are qualified to establish a Coverdell ESA.
Benefits of an Education Savings Account
The two primary advantages of an ESA are:
- The savings grow tax-free (No taxes on interest, dividends, appreciation, etc.)
- Withdrawals made are tax-free if they are used for qualified education expenses before the child turns 30
Qualified education expenses include tuition fees, books, room and board, supplies, equipment, etc. If a child has special needs, the 30-year old limitation does not apply.
Rules of Education Savings Account
An ESA can only be opened before the child turns 18. All contributions must be made before that time. Due to this rule, most parents or guardians open an ESA when the child is very young. This gives them adequate time to make sufficient contributions. All the contributions made must be used by the beneficiary before he or she turns 30.
The maximum amount you can deposit in an ESA is $2,000 per year. Depending upon their yearly contribution, individuals can easily calculate the amount they will have in the account when their child is ready to use the funds. The ESA, when combined with a 529 plan, can provide substantial help to parents in saving for the educational expenses of their children while saving on taxes.
Opening the Account
Generally, there is no fee charged for opening or maintaining an account. However, there might be an account fee or brokerage commissions. Depending upon the provider, the initial investment payment and the fee may vary. Before opening an account, check the annual fee the provider charges, as this can reduce your gross savings.