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COLLEGE SAVINGS 101

Finding the Right Coverdell ESA (Script)

09/16/2011

QUESTION:
Dear Joe,



I am having the hardest time finding a bank that has a Coverdell savings account that is not a certificate of deposit. I want just a savings account that I can put in up to $2,000. I have tried locally and online. Can you point me to a few institutions?

Please do not point me to 529 plans; I want a Coverdell account for personal reasons. We are older parents, and if we die, I want our relatives to use the Coverdell money for private schooling. ... It is not a lot, but it will help.



-- AJ


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ANSWER:
Dear AJ,

Itís not that I donít like Coverdell education savings accounts; we even maintain a list of low-cost ESAs on savingforcollege.com, but I can't help but point you to 529 plans. You may not realize this, but an ESA cannot be used for K-12 expenses after 2012. Beginning in 2013, withdrawn earnings are taxable and subject to a federal tax penalty unless they are used for eligible post-secondary expenses, such as college costs, just like a 529 plan.

Of course, Congress and the president could agree to extend the K-12 provision for ESAs beyond 2012, but I donít think you can count on that when we are facing big budget deficits.

The main reason I would point to 529 plans for your needs is that I have not come across any financial institutions offering a savings account as an investment option in an ESA. That doesn't mean there aren't any, but you would have to keep searching on your own to find one. Maybe you could try your local credit union. Also know that most of the ESA providers I am familiar with have high account minimums of $1,000 to $2,000.



So why am I steering you to 529 plans? Because you can find FDIC-insured savings accounts in a number of 529 plans, and these plans generally have low minimum contributions. Take a look at Utah, Colorado, Ohio, Virginia, and Indiana.

There are a number of other options in various 529 plans that offer the same degree of liquidity as a bank savings account and seek to protect your principal from loss, albeit without an FDIC guarantee. These include money market funds, stable-value options and guaranteed options. To locate them, use the 529 comparison tool at Savingforcollege.com.



If K-12 remains your target and you wish to stick with a bank savings account, you could simply open it under the Uniform Transfers to Minor Act, or UTMA. Although such an account is taxable, the interest income falls to the child's tax return where it can be fully sheltered by the dependent's $950 standard deduction. Best of all, UTMAs are easy to open and do not require that they be spent for any particular purpose.

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