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What is a Coverdell account?

By Jakob Jelling
http://www.cashbazar.com

Save money for education without paying taxes.

A Coverdell account is a particular way that you can save money for your child's education. The benefit of this account is that it is not tied to college. In fact, if you are making contributions to a Coverdell account (which works similar to a Roth IRA) then you'll be allowed to take money back out of the account tax free at any time, as long as you are using the money for some type of education. For instance, you can use money from your Coverdell account to pay for a private school, to buy books, or to pay for a tutor for your child.

There are a few disadvantages to getting a Coverdell account, however. The biggest problem is that any assets your child owns are going to be counted far more heavily than the assets that you own when it comes time to apply for financial aid. If you do not think that your family will be eligible for financial aid anyway, then this might not be a big deal. However, if you're worried about whether or not you will be able to pay for college without financial aid, then you might want to limit the contributions that you make to your Coverdell account - or just not open one to begin with.

The other thing that you should consider is that there are two age requirements that are very important if you want to avoid fees on your Coverdell. First of all, you can only contribute money to the Coverdell account up until your child turns eighteen. After that point, your child also needs to make sure that all of the money in the Coverdell account has been spent for educational purposes before he or she turns thirty. At that point, they will be given all of the remaining money in the account, but a ten percent fee will apply.

If you think that you want to set up a Coverdell account, then you can do this at any of the places you would be able to set up an IRA. Before you set up the account, however, you should make sure that you ask if there are any other fees involved.


About the author
Jakob Jelling is the founder of http://www.cashbazar.com. Visit his website for the latest on personal finance, debt elimination, budgeting, credit cards and real estate.

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