logo
  Join        Login             Stock Quote

Using Bonds And Coverdells For College

 August 28, 2012 10:06 AM


(By Nilus) In last week's column, I discussed the basics of 529 plans and explained why they can be a powerful way to save for a loved one's college education. But I also casually mentioned other alternatives like savings bonds and Coverdell education savings accounts.

Today, I want to discuss those two other choices a bit more so you can weigh them against the nearly-ubiquitous 529 plan.

Let's start with savings bonds, which are one of the oldest ways to save for higher education costs.

Using Government Bonds for College Expenses …

Both traditional savings bonds (Series EE) and the newer inflation-protected savings bonds (Series I) can be used to fund a child's college education.

[Related -Netflix, Inc. (NASDAQ:NFLX) Q1 Earnings Preview: Trending Towards a Double Surprise]

These bonds are issued by the U.S. Treasury and are considered among the most conservative investments available. That's because they are essentially guaranteed by the full faith and credit of the United States Government. (Yes, even though that might not mean quite what it used to!)

Let's first address the elephant in the room — neither of these investment categories are going to pay you a huge return given current interest rates. However, as I've explained in past columns, I-Bonds may actually be a reasonable buy right now for very conservative investors.

Regardless, the main advantage of using these instruments is that they couldn't be easier to buy and hold. You don't even need to open a special account of any type. Instead, you can just go to your local financial institution or visit www.treasurydirect.gov.

[Related -SolarCity Corp (SCTY): Baird Says Buy the Dip]

What's more, you don't need lots of money to get started — even a $25 initial investment is good enough!

The best part is that the interest you earn will be fully exempt from state and local taxes as long as the proceeds are used for qualified education expenses. That's something to consider when you compare the relatively paltry yields to other investment choices.

However, beyond the low returns, there's one other major catch: The interest exemption only applies to tuition expenses … NOT room, board, books, or other costs. Moreover, there are income restrictions to contend with.

Enter the Coverdell Accounts, Something I Use for My Daughter …

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.

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

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

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.

Another cool feature of Coverdell accounts is that — unlike 529 plans and savings bonds — 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.

Advertisement

And While Coverdells Also Have Income Restrictions …
You Can Easily Get Around Them With One Simple Step!

Technically, you cannot fund a Coverdell if you have a modified adjusted gross income above $110,000 filing singly or $190,000 married filing jointly. Phase-outs kick in at lower levels, too.

But here's where it gets interesting — even a child with no earned income can contribute to a Coverdell!

So if you're above the income threshold, you can just gift the $2,000 to the child under the Uniform Transfer to Minors Act and they can put it in the Coverdell themselves.

Yes, it's a stupid formality, but if it works in your favor, go with it!

And please note that you can establish a Coverdell for ANY child in your life — not just a direct relative but even a friend's child or grandchild. Corporations and trusts are also free to establish Coverdells.

Just know that a Coverdell's beneficiary can only have $2,000 contributed to his or her account in any given year. So you should always ask whether an account already exists and how much has been deposited before establishing one on your own. Contributions must also be made before the beneficiary turns 18.

Also, a Coverdell beneficiary has to use the funds before turning age 30, or else taxes and penalties will likely be owed. However, the account can always be switched to another beneficiary before then — even if the new recipient is between ages 18 and 30!

Bottom line: You don't get the potential for up-front tax deductions that you do with 529 plans … and they may not be as conservative as savings bonds … but Coverdells are a unique way to sock away a little extra money for someone special.

Plus, they can be fully funded alongside 529 plans or savings bond purchases so there's no reason you have to choose one over another!

Best wishes,

Nilus


This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageSanDisk Corporation (SNDK) Q1 Earnings Preview: Heads or Tails on Pop or Drop

SanDisk Corporation (NASDAQ:SNDK) will publish its first quarter 2014 financial results press release via read on...

article imageEstee Lauder Companies Inc (EL): Goldman Sachs is Convicted EL Will Make Your Portfolio Prettier

Want to freshen up your portfolio? Goldman Sachs say to add Estee Lauder Companies Inc (NYSE:EL). The read on...

article imageYahoo! Inc. (YHOO) Q1 Earnings Preview: Another Bullish Surprise Coming

Yahoo! Inc. (NASDAQ:YHOO) will discuss the company's financial results for the first quarter ended March read on...

article imageThe Coca-Cola Company (KO) Q1 Earnings Preview: Guidance About to Fizzle?

The Coca-Cola Company (NYSE:KO) plans to release its first quarter earnings results before the market opens read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.