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One More Way To Save On Taxes (And Help A Child In The Process) …

 April 10, 2012 09:27 AM

Okay, we're really getting down to the wire now, with just one week left to file your taxes on time.

This year you actually have until April 17th because the 15th falls on a Sunday and the 16th is Emancipation Day, a holiday that is celebrated in Washington, D.C. But still, we're talking a matter of days left.

And yet I have one more way for you to keep additional money away from Uncle Sam while helping a kid in your life.

It's called a Coverdell ESA, and it shares a lot in common with some of the other tax shelters I've been telling you about in recent columns. Only this type of account is expressly designed to help fund a child's education.

I've been using a Coverdell for my own daughter ever since she was born five years ago … and I made my latest contribution last week for the 2011 tax year.

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Yes, That's Right — You Can Still Fund
a Coverdell ESA and Have It Count for 2011!

Coverdell Education Savings Accounts used to be known simply as Education IRAs, and while they're not really "retirement" accounts, they DO function very much like Roth IRAs designed for young students.

In fact, like Roth IRAs, they allow you to sock away money — $2,000 a year, in this case — by tax day.

And like Roth IRAs, as long as the funds are used for the benefit of schooling costs, any returns earned in the account will be distributed free of additional taxation going forward.

While that's not an eye-popping number, it's still a nice chunk of change that will add up over the years.

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Plus, it's perfect for using any tax refund money you might have already received if you happened to file your taxes earlier than procrastinators like me.

Meanwhile, don't underestimate the benefit of that tax shelter!

Heck, let's say you happened to put $2,000 into your child's Coverdell account and invested it so wisely that within ten years it had miraculously turned into $200,000. That full amount would be available to pay for your kid's education, and not one penny of taxes would need to be paid as you pulled it out!

Another cool feature of Coverdell accounts is that — unlike ever-popular 529 Plans — they can be used for expenses related to ALL types of schooling: High-priced pre-K classes, private secondary education, and even many associated costs such as computers and books.

Originally both this feature — and the $2,000 annual contribution limit — were going to change. But last year's tax package kept both items intact through 2012 … which is great news.

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