Smart Saving for College—Better Buy Degrees

Coverdell Education Savings Accounts


Those who want more investment choices may want to consider Coverdell Education Saving Accounts (ESAs).


No Investment Restrictions


Formerly known as Education IRAs, ESAs are another tax-advantaged way to pay for college. Unlike 529 plans, your investment options are virtually limitless. Except for investing in life insurance contracts, you can buy and sell what you want whenever you want. Also, you can set them up at almost any brokerage firm, mutual-fund company or other financial institution.


Federal Tax Advantages


As with 529 plans, contributions are not deductible, but earnings in ESAs are tax-deferred, and withdrawals that are used for qualified education expenses are tax-free.


Education Expenses Covered


One advantage that ESAs have over other tax-advantaged saving options is that you can make tax-free withdrawals to pay for private elementary and high school expenses, as well as post-secondary school expenses. So if a private school is in the future, one option you might want to consider is saving for that expense in an ESA and using a 529 plan for college.


Contribution Limits


ESAs have two annual contribution limits for individuals:

  1. You can give up to $2,000 to any one beneficiary assuming you meet the ESA income limits discussed below.
  2. The total of all contributions to all ESAs set up for one beneficiary cannot exceed $2,000. If other family members set up ESAs for your child, you need to check with them to make sure this contribution limit is not exceeded.


Invest $2,000 a year at an annual yield of 6 percent from the time your child is born, and you will have a little more than $61,000 in college savings when your child turns 18. Can't save that much, or think you can get a higher return on your investment? Use our College Savings Calculator to estimate your savings.


Filing status: You can make the
full $2,000
contribution if…
Your ESA
contribution will be
reduced if…
You cannot
make an ESA
contribution if…
SingleYour modified adjusted gross income is $95,000 or less.Your modified adjusted gross income is between $95,001 and $110,000.Your modified adjusted gross income is more than $110,000.
Married filing jointlyYour modified adjusted gross income is $190,000 or less.Your modified adjusted gross income is between $190,001 and $220,000.Your modified adjusted gross income is more than $220,000.



Figuring Your ESA Contribution Limit

If your Modified Adjusted Gross Income (MAGI) is between $190,000 and $220,000 (joint filers), or $95,000 and $110,000 (single filers), you can figure your ESA contribution limit by using the following equations:


Married Joint Filers

$2,000 – (MAGI – $190,000) x $2,000 = Contribution Limit

Single Filers

$2,000 – (MAGI – $95,000) x $2,000 = Contribution Limit


Organizations, such as corporations, can also contribute to ESAs and are not subject to any income limits. For more information, see IRS Publication 970.


Fees, Charges and Expenses


Fees, charges and expenses will vary depending on the investments you choose and the institution with which you open an ESA. Remember, however, that because of the fairly low contribution limits, even small annual fees or expenses could make a big difference in the value of your investment over time.





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