Tuition, room and board, fees, books, supplies, equipment, and transportation. Sounds expensive, doesn’t it? Even if you’re a few decades removed from college, you know paying for college can be a struggle—and it’s only getting worse.

Higher education has changed immensely the last few decades, as technology is increasingly utilized on campuses. Typewriters have been replaced by expensive computers, textbook prices have increased, college students are more likely to own a car, and today more and more entertainment opportunities are available for students to spend their money on. Across the board, college costs more for students today.

But it isn’t just students who have more costly obligations today. Parents and the institutions themselves have been hit hard by the increase. The cost of educating a college student has skyrocketed, including an increase in tuition, room and board, and fees, not to mention supplies such as textbooks. Add in general inflation and continued cost increases and by the time your children or grandchildren enroll you’ve got the formula for a fairly expensive bill.

But that doesn’t mean you’re defenseless against the costs of higher education. There are several options available to save for college. Among the many educational savings opportunities available (and the one I’ll discuss today), one of the easiest ways to save for higher education is the Coverdell Education Savings Account (Coverdell ESA).

A Coverdell ESA (formerly known as an Education IRA) is a simple and reliable way to finance a future education. Any single individual who makes less than $110,000 a year in adjusted gross income (AGI), or married couple that makes less than $220,000 a year AGI is eligible to open a Coverdell. That means aunts, uncles, or even grandparents can open an account for any family member. Once the account is opened, a beneficiary is named. Contributions can be made to the account up until the beneficiary turns 18. One of the drawbacks to a Coverdell is the yearly contribution limit. Account holders can only contribute $2000 a year to an ESA. If a single person makes between $95,000 and $110,000 (AGI), or a married couple makes between $190,000 and $220,000 (AGI), the yearly contribution you can make gets gradually smaller. For more specific information on contribution limits, ask a financial professional. Coverdell’s are a great option for those who start to save early and want to put a little away each year.

Contributions to a Coverdell are not tax-deductible; however, any withdrawal for a qualified educational expense is tax and penalty-free. A qualified educational expense can include tuition, fees, and books. Another advantage to a Coverdell is if you are educating a child at a private elementary or secondary school. Withdrawals can be made from your account, tax and penalty-free for an educational expense as soon as the account is opened.

Once a child turns 18, contributions are no longer accepted into the account. The student must then withdraw all of the money from the account within 30 days after his or her 30th birthday. Any money withdrawn after the 30 days is taxable and also subject to a 10% penalty. Luckily, if you have a remaining balance in your account and you wish to continue using it for another child, you can change the beneficiary of the account.

Planning to save for college for your children or grandchildren can be a daunting task, but by working with a trusted financial professional, you may be able to reduce some of the stress and hassle associated with it. Coverdell’s offer unique advantages to other college saving techniques. They’re especially nice if you wish to put a reasonable, yet consistent amount away for an education, every year.

Robert Valentine
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