Coverdell Education Savings Accounts were created in 2001 to provide parents with more options to pay for their children’s elementary, secondary, and college education. Unless Congress quickly takes action, those accounts will no longer be allowed to fund secondary and elementary school expenses.
President Obama often talks of helping Main Street instead of rewarding Wall Street, and Coverdell accounts are a unique asset for Main Street investors. Parents can squirrel away $2,000 per year per child in Coverdell accounts. They can then invest that money however they like in stocks, bonds, mutual funds, and other investments. The gains are not taxed at all if they use the money on qualified elementary, secondary, or college expenses. These expenses include school supplies like computers and Internet access as well as tuition and room and board at school.
If Congress fails to act, parents will no longer be able to use the tax-deferred savings for pre-college expenses. That is because the law regarding Coverdell accounts sunsets in 2010, but there is no good reason to let this law expire. Furthermore, the expiration would violate President Obama’s pledge not to raise taxes on people making less than $250,000 a year. As it stands, Coverdell accounts are exempt from capital gains, dividend, and income taxes when used for a child’s education. When the law changes on January 1, 2011, parents will be able to use the money they have saved for many years only on college education.
The unjust sunset clause also changes the rules for people who don’t want their state governments to manage the money they save for their kids’ college educations in state-run 529 college savings plans. Main Street parents who think they can get a better return investing in the financial markets themselves than what the 529 plans offer could contribute $2,000 per year to Coverdell accounts towards college for each child. In 2011, they will be able to contribute only $500 per student, hardly enough to put a dent in the costs of college education.
If the law is not extended, the President and Congress will be at odds with those who invested in Coverdells. As it stands now, many children will consequently be subjected to underperforming public schools rather than getting a private religious or non-denominational education. The gains that families have made in these accounts will have to lay dormant until their children are college age. This is unfortunate, since some kids don’t go to college. Let’s hope Congress has a change of heart.