When building up a college fund, don’t overlook Coverdell Education Savings Accounts. It’s true that contributions are limited to a modest $2,000 per student per year. Even so, these accounts offer some valuable benefits.
* Tax breaks. Any investment income inside these accounts won’t be subject to income tax. Withdrawals are tax-free as long as the money is spent on qualified education costs.
* Investment control. Coverdells, offered by many financial firms, give you the option of choosing your investments. You might pick low-cost mutual funds, for example, or invest in securities paying high yields.
* Spending opportunities. With some tax-favored accounts, such as 529 plans, only amounts spent on higher education qualify for tax breaks. With Coverdells, you can use withdrawals for college bills but you also can take money out, tax-free, for education-related expenses for students in kindergarten through high school.
Drawbacks to Coverdells are more apparent than real. It’s true that married couples with income over $190,000 can’t contribute the full $2,000 to Coverdells while single taxpayers can’t maximize contributions with income over $95,000. However, anyone whose income is over those amounts can give $2,000 per student to a relative with qualifying income, who can then make a full Coverdell contribution.
