The Coverdell Education Savings Account (formerly known as the Education IRA) is a creation of the Taxpayer Relief Act of 1997. As the name implies, it's tailor-made for college savings.
Here are the answers to the five college-savings-plan questions:
- You can usually contribute up to $2,000 per year to an Education Savings Account, possibly less depending on your income. A child can only be "funded" by $2,000 per year, though. So you and grandma cannot each invest $2,000 in an Education Savings Account for your son each year.
- You can invest the Education Savings Account in just about anything.
- Although you pay taxes on contributions, withdrawals are tax-free.
- The recipient (the child going to college) technically controls how the money is spent, but he or she can only use it for education. If he/she doesn't use the money, you can transfer the account to a relative who will use the money for education.
- Money in the account can only be used for education.
The Education Savings Account is a good choice for anyone who qualifies. However, saving just $2,000 per year for college may not get your kid very far. As a result, the Education Savings Account should only be one part of your college-saving plan.
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