If you’re putting aside money for college, you’ve probably heard about savings accounts designed specifically to help with the almost $36,000 an average four-year degree will cost. You may also have heard about different types of these accounts, such as the Coverdell Educational Savings Account, or Coverdell ESA for short.
What you might not know, though, is how to make the best use of Coverdell ESA. There are rules governing Coverdell contribution rates and Coverdell qualified expenses, but these rules are pretty broad, especially the rules on how you can spend the funds in a Coverdell ESA. So how do you use a Coverdell to get the maximum benefit?
When saving for college in general, the earlier you start the better off you’ll be. This is especially true with a Coverdell account, though. The more you’re able to put into a Coverdell ESA early on, the more time that money will have to earn interest.
One of the biggest mistakes people make with an educational savings account is not putting enough money in it each year. You can contribute up to $2000 annually in a Coverdell account up to $10,000 total, so the closer you can reach that limit, the better off you’ll be.
The best way to hit the $2,000 savings limit each year is to divide that amount by 12, which is about $167, then look through your budget for money you can divert to the Coverdell Account. If you can’t find $167, put whatever you can towards the Coverdell and contribute any extra money you have at the end of the month.
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Invest the Coverdell ESA Funds
One of the best Coverdell ESA features is that you can invest the funds you put into the Coverdell account, and the earnings on that money aren’t taxed if they’re used for educational expenses. In other words, you’ll want to invest the funds in your Coverdell ESA.
Of course, there are a lot of investment strategies out there, and the one you pick will depend on how much money you have set aside, how much time you have to invest and how comfortable you are with risk. While you can do this yourself, you can also talk with financial planners, such as our friends at Round Table Wealth Partners to get expert advice on creating an investment strategy.
You can only contribute money to a Coverdell account until your child turns 18. However, your child can withdraw funds tax free from the Coverdell account for educational expenses until they’re 30. What this means is that the Coverdell money can be used to pay for expenses relating to college, graduate school and even adult education courses.
When you’re planning how to use Coverdell ESA funds, you’ll want to think long-term. Consider what your plans are after college, what you want to do with your career, and even if you’d like to reserve some funds in case you want to change careers in your late 20s. You should also think about what expenses you’ll want to cover with your Coverdell funds and what expenses you’ll want to pay for with a student loan.
Open a Coverdell ESA at First Alliance Credit Union
A Coverdell educational savings account can be a huge help for college students, but you need to know what to do to maximize its effectiveness. Parents should open a Coverdell ESA as soon as they can for their children, and regularly make contributions to the account and invest it. College students, though, need to think about what their educational plans are and figure out what expenses they should cover with the funds in their Coverdell account.
If you’d like to save for your child’s college education, become a member of First Alliance Credit Union and talk with a member experience advisor about opening a Coverdell ESA. You can also use our budgeting worksheet to figure out how much you can contribute to the account each month and track its progress through our online banking platform and mobile app.