Armchair Millionaire Community Bulletin: Get a Foot Up on College Costs with a Coverdell ESA

With college costs skyrocketing, parents need all the help they can get saving and investing for their kids' education. The Coverdell Education Savings Account is one easy option.

(PRWEB) March 16, 2004 --The Coverdell ESAs are just one of many options you have when it comes to saving for college. When we asked members of the Armchair Millionaire community about how they are paying for colleges costs, we found out that they are using all sorts of methods. Here is how one person who is using two kinds of plans:

"I take advantage of almost every tax-advantaged savings program available, so I'm a big fan of 529 plans and ESAs. I have twin boys who are 3 and so am always thinking about education costs. I am from Delaware and so am using the Fidelity Delaware 529 and have been very pleased. I have direct deposit from my bank into the Fidelity program for both boys. In addition, I make cash contributions quarterly to ESAs for both children. I fund the ESA with pocket change that I have at the end of each day. About every other month, I take that change and deposit it directly into the ESAs and then make up the difference (the maximum allowed contribution less my pocket change) in December. So far so good." --Matt from Wilmington, DE

If you decide that the Coverdell ESA is one of the options you might pursue, my guide will provide you with the basics of what you need to know.

The Armchair Millionaire's Guide to Coverdell Education Savings Accounts

What they are. Coverdell ESAs are investment accounts that allow you to save for a child's education. Formerly called Education IRAs (an amazingly confusing name), Coverdell ESAs are a straightforward, easy way to build your child's education fund.

How you'll save on taxes. If you know how a Roth IRA works, you know how a Coverdell ESA works. You fund the account with after-tax dollars, but then your money grows tax-free. As long as you use withdrawals from the account to pay for qualified education expenses (which include tuition, room, board and books), you'll never pay a dime of tax.

How you can use them. One of the nicest features of Coverdell ESAs is their flexibility. Unlike some college savings programs, you can use money from your Coverdell account to pay not just for college expenses, but for public and private elementary and secondary schools as well.

How much you can contribute. The child can have a maximum of $2,000 deposited in his or her account per year. More than one person can make contributions, but the total contributed still cannot exceed $2,000.

Who can contribute. Anyone can contribute to a child's Coverdell account-you don't need to be a parent, or even related at all. However, there are income guidelines that determine edibility. Single tax filers whose adjusted gross income is $95,000 or less can contribute, as can joint filers whose adjusted gross income is $190,000 or less. For people earning more than those amounts, eligibility decreases and eventually disappears as income increases.

How they can help. Let's assume that you open a Coverdell ESA for a newborn and contribute the maximum allowed amount of $2,000 each year. Let that money grow at an average annual rate of return of 10 percent, and you'll have a tad over $100,000 on hand by the time your child is 18 and ready to head for the ivory towers.

How to open one. You can open a Coverdell ESA at banks, mutual fund companies or brokerage firms. You can choose from a wide range of investments, including stocks, mutual funds and bonds.

THE BOTTOM LINE: When approaching any sizeable financial task, it's important to be flexible and ready to draw from a whole range of tools. When it comes to paying for college, Coverdell ESAs, 529 plans, custodial accounts, regular brokerage accounts and student loans can all be part of your tool box.
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ArmchairMillionaire.com was founded in 1997. The company's first book, The Armchair Millionaire, was published in 2001. Today, www.ArmchairMillionaire.com is an established community of common sense savers and investors.