Send your children to private school

The Coverdell Education Savings Account used to be referred to as the Education IRA and was limited in its usefulness. The annual contribution was $500, which didn't get you very far if you were sending your child to college. In 2002 the level was raised to $2,000 and could be applied to schooling other than college. Considering how expensive private high schools have become, this is an excellent feature and perhaps the most important one.

Other features of the Coverdell ESA include:

  • Any child under the age of 18 can have one.
  • Funds in the account grow tax-free.
  • They can be invested in any type of asset.
  • The beneficiary (child) can be changed should they decide not to go to school.
  • Withdrawals are tax-free when used for school expenses.
  • You are able to contribute to both the Coverdell ESA and 529 College Savings Plan.
  • Anyone can contribute to the plan.
  • School expenses other than tuition can include books, computers, uniforms, etc.
Some details to keep in mind with these plans:
  • All funds must be withdrawn by the beneficiary by age 30.
  • There is a 6 percent tax on contributions over the $2,000 annual limit.
  • All contributions are reported under the beneficiary's name and social security number, reducing the potential financial aid available.
  • Any withdrawals that don't qualify will be taxed in the hands of the beneficiary and not the person making the contribution.

Any time the government provides you with the opportunity to grow your savings on a tax-deferred basis it's usually a good idea to take them up on the offer. You can worry about the implications later on when you need to withdraw the funds. Albert Einstein considered compound interest the most powerful force on earth. Make the compounding tax-deferred and you've got something valuable.

The Coverdell ESA is an excellent supplement to the 529 college savings plan and prepaid tuition plan. Its biggest benefit (in addition to the tax-deferred compounding) is that it can be used prior to college allowing you to save for your child's private high school education. That alone could make a difference where they attend college. The choice is yours.

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