Research applicable tax law. When setting up an ESA account, there is an income limitation set by the Internal Revenue Service (IRS). Another tax implication is that the contribution made to the ESA account is not tax deductible. However, when the child becomes eligible to receive this educational benefit, the contribution made to the account is tax free. If you are financially able to hire a tax accountant, then it may benefit you to do so. The IRS provides information on the income limitation and the amount that can be contributed to your child's education in Topic 310--Coverdell Education Savings Account.
Open a bank account and obtain financial guidance from a financial advisor. A financial advisor can make sure you are compliant to the tax law and provide an array of investment options for this account, which in the long run can create greater return. Also, your financial advisor can help you choose a more diversified investment portfolio to create better returns.
Determine your adjusted gross income. According to the IRS, you can't earn more than $110,000 individually or $220,000 as a couple annually to set up the ESA account. The limitation is based on your modified adjusted gross income or MAGI. A simplified definition of MAGI is your total income minus various deductions such as 401k and medical expenses.
Determine the number of children whose names will become beneficiaries on these accounts. Knowing the number of children who will benefit from this account is important because the IRS sets the limit that can be contributed to the account at a total of $2,000 per year per child.
Calculate your monthly contribution to your child's future education by dividing $2,000 by 12 which totals to $167. The maximum allowable contribution is $2,000 per year on all the accounts for each beneficiary. However, if you have more than one child for whom you are saving, $2,000 can be saved for each child per year. As a parent you can take advantage of the benefits in settting up such an account to help save for your child's education.