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Coverdell Fade-Out: How this affects your plans for college savings

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As a little reported part of the recently passed tax bill, the Coverdell Education IRA will undergo some rather major changes:

1. The annual contribution is expected to drop from $2000 per year to $500 per year, and

2. The savings will no longer be able to be spent on anything other than college; presently, if you are a parent saving for your child, you can actually apply the monies to K-12 education as well.

While Congress could still vote to re-extend these benefits, most aren’t optimistic that that will happen.

Even with the changes, Coverdells may still be the preferred savings vehicles for some families, since they tend to offer more investment flexibility than the more popular 529 College Savings Plans.

In light of the changes, you have a number of options. You can:

  • Leave your accounts in place to continue earning interest tax-free for useage during college only
  • Cash our your accounts and use the money immediately to pay for K-12 education expenses
  • Roll over your Coverdell accounts, penalty free, to a Roth IRA for retirement

If you want to learn more about how these changes in the Coverdell ESAs may affect your financial planning and your child’s ability to go to college, be sure to consult with a licenses tax expert and a certified financial planner or investment broker.

What plans are you making to deal with the Coverdell ESA Sunset?

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