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Saving for College #1: The Education Savings Account

September 26th

In this day and age, when many new parents in America are still struggling to pay off their own college loans, sending a child to college can seem like an insurmountable task. The cost of a college education just keeps growing with every year. The College Board® estimates that in the next 18 years, the cost of a private college education will reach $340,800, with public four-year college costs reaching $95,000.

Coverdell Education Savings Account (ESA)

For this reason, it is more important than ever that parents start saving funds for their children’s education as early as possible. In service of this end, the Internal Revenue Service offers Coverdell Education Savings Accounts (ESA) to taxpayers with a modified gross income under $110,000 (or $220,000 for those filing joint tax returns).

A Coverdell ESA is a trust or custodial account created or organized in the United States, solely for the purposes of funding the education of a designated beneficiary. Funds must be spent only on qualifying expenses at an approved educational institution. The beneficiary must be under the age of 18, or be a special needs beneficiary.

Money in the account must be strictly designated for educational purposes at the time the account is created. Account funds may not be invested in life insurance contracts or combined with other property, except in the case of a common trust fund or common investment fund.

Contributions made to such accounts are not tax deductible, but money deposited into the account will grow, tax-free, until withdrawn or distributed. Likewise, if distributions from an ESA are less than the beneficiary’s educational expenses for that year, the beneficiary will not owe taxes on the distributions.

 
 
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