I’ve read quite a few online discussions regarding the Coverdell ESA, and I’ve noticed that there is quite a bit of misinformation out there regarding these accounts. Let me clear up a few things by referring to the official authority, the IRS. The IRS’s March 26 edition of Tax Tips provides a good summary of the key features of the Coverdell ESA, and it includes several links to more in depth information. Here are some highlights:

• Earnings on contributions will be distributed tax free, provided that they are used to pay the beneficiary’s school or college education expenses.
• Up to $2,000 may be contributed to a child’s Coverdell ESA each year (assuming your adjusted gross income is less than $95,000 for single taxpayers and $190,000 for married taxpayers).
• You can fund both a Coverdell ESA and a 529 account as long as you don’t exceed the annual gift tax exclusion per child (currently $13,000 or $26,000 for married couples, see IRS Publication 950).

Another good source of information on the Coverdell ESA is Savingforcollege.com. They provide a detailed list of the advantages and disadvantages of the Coverdell ESA.

I decided to open up my Coverdell ESA with Firstrade. There are not many options for opening up a Coverdell ESA with an online discount broker and many of the remaining options charge annual maintenance fees (a major drag on performance for a small account). Firstrade has no annual fees, no account establishment fees and low commissions. The only drawback is that they have a $50 out-going account transfer fee if you decide to move your money to another broker. I have a Roth IRA with Firstrade and I’ve been fairly pleased with their service so far. If you are interested in opening an account with Firstrade, I would be more than happy to send you a referral (Disclosure: I get some free trades for referrals).

Originally published on October 17, 2004. Updated to reflect current rules.

I’m dedicating all my Amazon.com sales to my daughter’s Diaper Fund.  To help me earn enough to keep the Diaper Fund cash flow positive, I’ve opened up the Fat Pitch Financials Store. I encourage you to browse my selection of top value investing books and other items investors might need and enjoy.

If I manage to generate enough revenue for the Diaper Fund to keep my daughter in diapers until she is potty trained, I’ll put the remainder into her college fund. To help kickstart her college fund, I’ve enrolled her into upromise.com.

Upromise is a rewards program that earns your child college money when you buy selected products using your grocery cards, shop online through the upromise.com website, use the Citi Bank Upromise credit card, or dine at one of the participating restaurants.

You can open up a 529 college savings plan through Upromise to help the rewards you earn grow. I found their New York State plan to be fairly low cost with its use of Vanguard Funds. I encourage you to sign up for upromise.com if you have young children or if you want to help someone in your family save for college. Heck, if neither situation applies to you, feel free to contact me and I’ll add you to my daughter’s friends and family list at Upromise.

I have been usingfor about a year and a half now, and I’m very happy with the results. I’ve already saved over $300 by registering my grocery cards and credit cards with them. I am also encouraging a few of my relatives to register to help save for my son. With more than sixteen years to go before my son’s ready to go to college, this little bit of money being invested in a 529 college savings plan might actually add up to some significant dough.

Regardless of your plans, I encourage you to check outand register with them as soon as possible. I’m sure you’ll find a use for the college savings money. If not, drop me a line and I’ll invite you to help contribute to my son’s college fund.