College and Coverdell

Many parents here the words "Saving for College" and shudder at the thought.  We wonder how we could possibly afford the expense when the time comes.  I envied the trust fund kids that attended college while I was there.  They had enough money to buy all of their textbooks new and still have enough left over to buy pizza.  My kids wont be so lucky.

I expect my kids to finance some of their college when the time comes.  I believe that by investing some of their own funds into their education, they will take it more seriously.  I don't want them to do it on their own though, and so we have been putting money aside since they entered the world specifically for their education.

There are lots of options out there of where to put college savings.  529 plans are popular, but I don't like the lack of flexibility these funds provide.  I prefer to pick the mutual funds that my kids invest their money in.  Instead, I have chosen the much less popular option of a Coverdell or Education IRA account.

The Coverdell account works a lot like the IRA - you put after-tax money in, and the money that grows in the fund can be withdrawn tax-free later.  With a Coverdell account, the funds must be used for educational expenses.  These expenses can be used for grade school on up and are not specific for college.  There is a limit of $2000 that can be invested in these accounts per year which is one reason they are not so popular.  If a Coverdell account is opened for a child that does not use the funds for educational expenses, the money can be passed on to a sibling or other relative, still tax-free.  I like the freedom to pick the fund that money is invested into.

Of course there is other fine print related to the Coverdell account, including income restrictions and possible withdrawal penalties, but that is for you to investigate should you want further information on the accounts.  We currently have it set up for a monthly automatic deposit of $100 into each of our kids' Coverdell accounts.  These small amounts can grow pretty big over time.  They are easy to set up, and require little effort afterward.  I recommend the Coverdell along with state-sponsored plans to best save for college.  State plans vary, so it is best to talk to your own accountant to decide what is best.

Several mutual fund companies offer the Coverdell accounts, so simply asking for information from your own mutual fund company is a great way to get started.  Tomorrow, I plan on covering the 529 plans and how they differ.

Thanks for reading!