More uses for Coverdell
Paying for a child’s college education is often a stressful ordeal for parents, which is why there are plans such as the Coverdell Education Savings Account (CESA) and Section 529 that assist with payment. Unfortunately for parents using the CESA, this method is not the best way to save up, as it has a much lower contribution limit than the Section 529 plan. The money contributed to this account can hardly be considered useless though, as there are multiple alternatives that can be used to capitalize on these tax-free distributions
The CESA, under current law, allows for parents or grandparents to contribute up to $2,000 annually per child or grandchild. After the contributions are made, the account can grow on a tax-deferred basis and money can be withdrawn, tax-free, to pay for school related expenses. While this may sound like a college related tool, the Section 529 plan is better for that. Instead, the distributions from a CESA can be used to pay for private schooling from kindergarten through twelfth grade, or if the child attends public school, the money can be used for school related expenses such as books and supplies, tutoring, computers, equipment and software, and possibly even internet.
Paying for college can be stressful, and while using a CESA is not always the most effective way to handle it, it is not a waste of money. If you are able to start a viable Section 529 plan, that would be the ideal course of action, and if this means replacing a CESA, you now know how you can utilize the funds in an effective manner.
