When a child is born, it’s only too common that parents will start thinking about the child’s future. This includes saving up for college and evading the need for student loans. Usually, parents start a college savings fund, but what about the high school and elementary years? Fortunately, there is a fund that covers both expenses called the Coverdell Education Savings Account or ESA.
What Is ESA and What Does it Have To Offer?
The ESA allows contributors to deposit up to $2,000 per year on the fund. The best thing about it is that depositors don’t get taxed on earnings from interest, appreciation and dividends. This allows more growth of the money that parents put in for their children. Regular savings account would normally charge taxes on the earnings of an account, but this levy does not apply for the ESA.
How to Qualify?
Your modified adjusted gross income or MAGI will be the basis for qualification. Aside from the parents, friends and relatives may also contribute to a child’s ESA as long as they meet the qualifications. Several factors will determine qualification of income, and a table for income ranges and contributions has already been set.
Basically, you can contribute $2,000 per child if your income is less than $95,000 for single individuals, and $190,000 for a married couple. Individuals with a MAGI between $95,000 and $110,00 can contribute a portion of the $2,000.
Avoiding Tax Deductions
Although the ESA is a tax advantaged investment, there are also instances when your child will pay tax on earnings. This would be because of violation of the fund’s rules. Some policies include choosing a school that allows federal financial aid, using the money for other expenses not included in the table of qualifying education expenses, and not using the money by the time the child turns 30. There are also regulations on putting in too much for a child.
The rules state that only $2,000 in deposit is allowable per year.
There are certainly some advantages with investing in an ESA for your child. Tax benefits are one of the strong reasons why an ESA would be a good replacement for that usual savings account or college fund. Also, if the funds are unused by the time the child turns 30, there is a provision that allows the rolling over of the money to another family member.