This investment retirement account (IRA) is useful to you as an investor to understand because it may be a good way for you to save for your kid s education AND save on taxes. These plans are now called Coverdell Education Savings Accounts in honor of the late U.S. Sen. Paul Coverdell. Individuals can make annual contributions of up to $2,000 per child into an account that’s exclusively for helping to pay higher education costs. The money contributed to a Coverdell account doesn’t count against the $3,000 ($3,500 if 50 and older) annual total individuals may contribute to their combined personal individual IRAs.
The earnings and withdrawals from a Coverdell account are tax-free, but you can’t deduct the contributions from your income tax because the account is for the benefit of the child, not the contributor. This is great for parents who are good savers and investors who want to make an annual tax-saving contribution that they can invest in the stock market toward the education of a studious and responsible child. In addition, if your child received a Coverdell ESA distribution, you now can also claim Hope Scholarship or Lifetime Learning credits. Just make sure you don’t use Coverdell money to pay for the same expenses you use to claim an education credit.
The beneficiary (your child) of the education IRA must withdraw the funds by age 30 if they don t go to college and pay taxes and penalties on it. However, the account can be transferred to a sibling or the beneficiary’s child if they don t pursue a higher academic degree or use it all.
Once you have the account open you can use the stock market to help finance your child s education selling the stock at a high price after you have bought it at a low price using techniques such as I teach.