How to Open an Education IRA

If you have a newborn or a toddler, now is the time to start saving for college. Costs continue to skyrocket, which means that college tuition could eventually cost nearly $250,000 by the end of a four-year program. The Education IRA, most recently known as the Coverdell Education Savings Account, is one of the many financial aid options.

Instructions

Difficulty: Easy

1. Review the benefits to see if the plan is appropriate for your family's needs. With the Coverdell Education Savings Account, you or your student can control contributions and withdrawals. Depending on the bank or brokerage, you can also control how the money is invested, such as through stocks, bonds and mutual funds. Remember that you or anyone in your family can contribute up to $2,000 annually per child.
2. Evaluate the requirements for opening a Coverdell ESA to see if you qualify. Research various banks or brokerage firms, such as Wachovia or Charles Schwab. Make sure that you can also meet the minimum deposit requirements, if any, to open the Coverdell ESA.
3. Open the account once you've gathered the necessary information. Apply online or visit the bank or brokerage firm to speak to a representative. Steps for applying may vary, but you'll likely need to provide information on the application such as your child's date of birth, social security number and beneficiary designation.
4. Complete and sign the Coverdell ESA application, along with some confirmation forms. You may receive a welcome kit either in-person or by mail that provides additional facts about the savings account.
5. Fund the account on the same day that you opened it, if possible. This applies if you opened the Coverdell ESA in-person. Deposit the money electronically from another bank account that you own or by mail if you opened the account online.

Tips & Warnings

• The Coverdell Education Savings Account is similar to a Roth IRA because you can add or withdraw funds tax-free as long as they are used to pay for qualified educational expenses. These include tuition, books, computers, tutoring, uniforms, transportation, school supplies, and room and board.
• In addition to college, you may plan to use the Coverdell Education Savings Account for K-12 expenses, such as private school tuition. You may also want to open a Coverdell ESA to supplement your personal savings or a state-sponsored tuition savings program to ensure that expenses will be covered.
• The Coverdell ESA can be provided for any child until she turns 18 years old. Parents, grandparents and other relatives can fund the account up to $2,000 per year per child.
• If Coverdell ESA contributions reach more than $2,000 in a year, expect to pay a tax penalty. The beneficiary must use the money by age 30 or else it will be taxed as ordinary income. A 10-percent penalty will also be applied.