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Another Way to Save for Education

Coverdell education savings accounts can be used for a bigger menu of education costs than 529 savings plans.

Is it worthwhile to invest in an education IRA for my son? Where can I open one?

Coverdell education savings accounts (what education IRAs are now called) aren’t the best way to save for college, but you can use the money for qualified education expenses for elementary or secondary school (such as private school tuition, tutoring and other expenses). A 529 college-savings plan is a better bet for college savings because contributions aren’t capped, but funds in a 529 can only be used for college or graduate school.

Contributions to Coverdells are limited to $2,000 per beneficiary per year (even if several people contribute). You can make contributions only until the beneficiary reaches age 18, and the money must be used before the beneficiary turns 30. Earnings on money used for education expenses are tax-free. To qualify to contribute, your income must be less than $110,000 if you’re single or $220,000 if you’re filing a joint return.

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Because of the low annual investment maximums, a lot of brokerage firms and mutual fund administrators don’t offer these accounts. But a few brokers, such as Charles Schwab, TD Ameritrade and Scottrade, do offer low-cost Coverdell accounts. You can find a list of brokers and mutual fund companies that offer these accounts at the SavingForCollege.com Coverdell provider page.

For more information about Coverdell ESAs, see IRS Publication 970 Tax Benefits for Education.

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