529 College Savings Plans

Coverdell Education Savings Accounts

Those who want more investment choices may want to consider Coverdell Education Saving Accounts (ESAs).

No Investment Restrictions
Formerly known as Education IRAs, ESAs are another tax-advantaged way to pay for college. Unlike 529 plans, your investment options are virtually limitless. Except for investing in life insurance contracts, you can buy and sell what you want whenever you want. Also, you can set them up at almost any brokerage firm, mutual-fund company, or other financial institution.
Federal Tax Advantages
Earnings in ESAs are tax-deferred, and withdrawals that are used for qualified education expenses are tax-free. Unlike 529 plans, there is no “sunset provision” in 2011 on the tax-free status of qualified plan withdrawals.
Education Expenses Covered
One advantage that ESAs have over other tax-advantaged saving options is that you can make tax-free withdrawals to pay for private elementary and high school expenses, as well as post-secondary school expenses. So if a private school is in the future, one option you might want to consider is saving for that expense in an ESA and using a 529 plan for college.
Contribution Limits
ESAs have two annual contribution limits for individuals:

You can give up to $2,000 to any one beneficiary assuming you meet the ESA income limits discussed below.

The total of all contributions to all ESAs set up for one beneficiary cannot exceed $2,000. If other family members set up ESAs for your child, you need to check with them to make sure this contribution limit is not exceeded.

If you exceed these contribution limits, there is a 6% excise tax on excess contributions unless the excess amount is withdrawn within six months of the contribution.
Invest $2,000 a year at an annual yield of 6% from the time your child is born, and you will have a little over $61,000 in college savings when your child turns 18. Can't save that much or think you can get a higher return on your investment? Use our College Savings Calculator to estimate your savings.
Income Restrictions
A couple filing a joint return can contribute $2,000 if their modified adjusted gross income is less than $190,000 a year. The ability to contribute is phased out for couples filing jointly with modified adjusted gross incomes of between $190,000 and $220,000. Contributions are not allowed for couples filing jointly whose modified adjusted gross income is above $220,000.
Single taxpayers will be able to contribute $2,000 if their modified adjusted gross income is less than $95,000. Single taxpayers' ability to contribute is phased out if their modified adjusted gross income is between $95,000 and $110,000. No contributions are allowed if their modified adjusted gross income is above $110,000.
Organizations, such as corporations, can also contribute to ESAs and are not subject to any income limits.

Figuring Your ESA Contribution Limit. If your income is between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single filers), you can figure your ESA contribution limit for 2002 by using the following equations:
Married Joint Filers
$2,000 - (Modified Adjusted Gross Income - $190,000 * $2,000) = Contribution Limit
$30,000

Single Filers
$2,000 - (Modified Adjusted Gross Income - $95,000 * $2,000) = Contribution Limit
$15,000

Fees, Charges, and Expenses
Fees, charges, and expenses will vary depending on the investments you choose and the institution where you open an ESA. Remember, however, that because of the fairly low contribution limits, even small annual fees or expenses could make a big difference in the value of your investment over time.

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