College Planning

Of all the gifts you give to your children, none may be as important or as valuable as a college education. But, paying for a child’s college education can be a financial challenge.

According to the College Board, the average cost for a four-year private university during the 2006-07 academic year was $22,218, up 5.9% from the previous year. The average price tag at a four-year public university was $5,836, an increase of 6.3% from 2005-06. And, chances are, college costs will continue to rise at a faster rate than inflation, which was 2.4% in February 2007 (calculated on a year-over-year basis).

These figures underscore the importance of starting a college-savings plan sooner, rather than later.

Coverdell Education Savings Account

The Coverdell Education Savings Account (ESA), formerly known as the Education IRA, allows parents, grandparents, relatives and friends to collectively contribute up to $2,000 a year per child for qualified college, high school or primary school expenses. You may make annual contributions until the child reaches age 18.

Contributions to a Coverdell ESA are not tax-deductible, but earnings accumulate tax-deferred. As long as you use the withdrawals from a Coverdell ESA for qualified education expenses—including tuition and fees, books and supplies, room and board, tutoring, transportation, etc.—those withdrawals will be tax- and penalty-free.

To contribute to a Coverdell ESA, you must meet certain income requirements. If you're married and file a joint tax return, your modified adjusted gross income cannot exceed $220,000. If you're single, your income must be less than $110,000 to qualify for a Coverdell ESA.

You must use the assets in a Coverdell IRA by the time the recipient reaches age 30. You also may transfer the assets in one Coverdell account to another family member's Coverdell IRA.