The Coverdell Educational IRA is one of the many college financing options you can avail. It is highly favorable in terms of tax and ease in savings. Originally called Education IRA, it was revamped and renamed into the Coverdell Educational IRA that we know today. This education IRA was renamed in honor after the late US Senator Paul Coverdell of Georgia.
There are also major changes in the features of the new and improved education IRA that allows many families to benefit. These are:
1. Upgraded contribution limit from $ 500 to $ 2,000 per year.
2. Additional money can be made until the tax filing deadline which is April 15.
3. Adult family members, relatives, family friends and godparents can put money into the child’s account as long it does not exceed the $ 2,000 yearly contribution limit. An annual excess contribution tax of 6% will be charged if the contributions exceed the limit.
4. For a child with special needs, he/she can receive an account and contributions even if he/she is 18 and above
5. High earning parents have limited contributions. To make full contributions for your child’s Coverdell Educational IRA you should either be:
-A single person earning $ 95,000 or less per annum, filing individually
-Married parents earning $ 190,000, filing jointly
If you are a single taxpayer earning $ 100,000, or a married couple jointly filing taxes and earning $ 220,000, you are only allowed to make limited contributions.
For higher earners, you cannot contribute at all as per IRS rules.
6. You can simultaneously contribute to a account while contributing to a state college tuition program, provided that these accounts are for a single child only.
7. Pre-college expenses can also benefit from account, so long as the expenses are eligible and within the scope of the allowable education expense.
Now, the one concern you are likely to ask is where to put the money? Actually, any financial institution that handles IRAs can help you. A bank, a brokerage, an investment company and others, can help you set-up an account and manage the funds. You may use any eligible investment medium that is offered by the financial institution. It could be through mutual funds, stocks, certificate of deposit, bonds and others.
There is a limitless way of investing your funds, as long as the total contributions will not exceed the maximum allowable limit of $ 2,000 per year, per student. If your child declines going to college, his Coverdell Educational IRA money can be withdrawn once he/she reaches 30 years old. However, this is taxable.
In order to save from taxes and to save money for other younger kids in the family for college by turning over the unused funds from your older kid’s Coverdell Educational IRA.
Like most IRAs, if you wish to get more you need to save as early as possible. Once you have a child in the family, it is advisable to put up a Coverdell Educational IRA as early as 6 months old. This helps parents establish a larger amount of funding for their child’s college expenses, and the ease in paying for these expenses are worth the effort.
Remember the important aspects of funding for your child’s college education: the earlier the better and a strong funding through Coverdell Educational IRA can make a huge difference.