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The Curious Bag
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A Coverdell IRA CD is a CD that is purchased for saving money for college in a Coverdell Education Savings Account. These were formerly called Education IRAs, which is why you will often see Coverdell and IRA used together, although the official name is Coverdell Education Savings Account.
Time Frame
Education IRAs were established as part of the Taxpayer Relief Act of 1997.
Function
The concept behind the Coverdell Education Savings Account is similar to that of a Roth IRA, in that your contributions to the account are not tax deductible, but the money earned in the account is not taxable either.
Features
All deposits to a Coverdell account must be made in cash and the cash is used to purchase a CD, which will yield higher interest than if the money were kept in a traditional savings account.
Considerations
Coverdell accounts were of little use to many people until 2002, which is when the government increased the contribution amount from $500 to $2,000 per child. Total contributions for any one child cannot exceed $2,000 even if several different family members open accounts for the child.
Warning
Contributions to a Coverdell have to be made before the child reaches age 18, and all money must be withdrawn from the account by the time the beneficiary reaches age 30 or else a 10 percent penalty will be imposed and the earnings will be taxed as normal income.
Source:
Guaranty Bank: Coverdell Education Savings Account
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