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How to choose a College Savings Account

College savings plans have special tax benefits that help your money grow more.

 

The earlier you get started, the more opportunity you have for your money to grow.

Special Accounts for Education Saving can help saving for college 

A Coverdell Education Savings Account (ESA) has similar benefits to the more well-known 529 Savings  Plan.

 

Like a 529 college savings account, a Coverdell is a savings account with special tax status to encourage and reward saving for qualified education expenses.   

 

Deposits to both a Coverdell and a 529 account grow tax free until distributed and withdrawals are tax-free when used for qualified educational expenses.   

 

Very different are the requirements for contributing to and withdrawing funds:

 

 

Coverdell

  • K-12 and college qualified expenses  

  • $2,000 limit on total annual contributions

  • Beneficiary must be younger than 18 

  • Contributions are not tax deductible.

  • Beneficiary must be under 18

  • Funds must be withdraw by age 30

  • Modified adjusted gross income must be less than $110,000 ($220,000 joint)

 

529 PLAN

  • College qualified expenses only

  • No annual contribution limit

  • No age restriction on beneficiary

  • Contributions may be state-tax deductible

  • No age limit on beneficiary

  • No time or age limit on withdrawals

  • No income limit to establish account

If you qualify you may set up both a Coverdell and a 529 for each student beneficiary. 

Alert: Withdrawals are only tax-free if used to pay qualified education expenses. The earnings portion of all non-qualified withdrawals will be subject to income tax plus a 10 percent penalty tax. 

Other pieces in this series: 1. How to manage college savings plans for financial aid eligibility; 2. Leveraging 529 accounts a gift and estate tool; 3. Weighing a state tax deduction against 529 plan performance, 4. How to determine if you are eligible for education tax credits.

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