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Big Changes for Education Savings Accounts

Coverdell education savings accounts have allowed investors to save for their children’s education in a tax favorable account for many years now. Unless Congress takes action many important provisions will expire at the end of this year. Here are some of those changes:

* The contribution limit will change from $2,000/year to $500/year

* Qualified distributions are currently allowed for elementary, secondary, and postsecondary education; in 2011 qualified distributions will only be allowed for postsecondary education

There are other important provisions that will also change if Congress fails to act. (Those other changes are also unfavorable.) The two changes above are the most notable changes. If these favorable provisions are allowed to expire the question to ask is ‘what now?’ For many people the best option will be direct funds that were previously targeted for Coverdell accounts into a 529 account. Previous legislation made the favorable provisions of 529 accounts permanent so this will be the best choice for most investors.

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