Saving for our kids’ post-high school education can be confusing. There are numerous kinds of accounts, savings methods, and, well, who knows what is best. In the last post, I talked about 529 accounts which are, to me, the best way for a large family to save for their kids. Today, I want to talk about another way to save: Coverdell accounts.
What are Coverdell accounts?
It is a savings account for educational purposes that can be used to pay for either college or K-12 private schools. These funds must be used for education-related expenses and must be used before the beneficiary’s 30th birthday. For those with special needs, these rules are a bit lenient.
The yields are usually a bit higher than traditional savings accounts. Still, unlike 529 plans, you cannot deduct the deposits from your taxes.
There are also limits to whom can contribute. You have to have a modified adjusted gross income (gross income minus specific deductions) of less than $110,000 for single filers and $220,000 for married or joint filers. Others like grandparents can make contributions but only if they qualify based on income.
You cannot use stocks or investments to make your deposits. They must be in cash. You also can’t contribute after the beneficiary’s 18th birthday.
Contributions for each year must be made by the due date of your tax return.
Another vital thing to note is that contribution amounts are capped based on income. If you are single, making $110,000 based on your modified adjusted gross income, you can contribute $2,000 a year. If you earn less, you will be required to deposit less.
And suppose you accidentally calculate the amount you are allowed to deposit wrong, resulting in an over deposit. In that case, you will be charged a 6% fee.
The last important thing to note is that you can open multiple accounts of this type for one beneficiary. Still, the maximum deposit rule counts all deposits made in each account. So you must spread your allowed deposits between accounts.
You can open separate accounts for different beneficiaries, and each will have its own contribution cap.
Where can you open one?
Coverdell accounts are available at most financial institutions, so do your research before picking one. Coverdell accounts will have their own rules, and each institution will, too. You will need to understand both before you open one. In addition, the minimum deposits and fees may differ between institutions, so speak to a professional and ask for an itemized fee list so you don’t end up paying too much in fees.
I would love to know how you are saving for your kids’ futures? Please leave me a comment, and let’s talk about it!