How to choose a College Savings Account

February 17, 2017

 

Bottom Line:

529 Plans, a Coverdell, and Prepaid Tuition Plans are all tax-advantaged accounts to help you save for education expenses 

 

Sarah asks: How is an Education IRA different from a 529 Plan?

 

An 'Education IRA' is now referred to as the Coverdell ESA.

 

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

- 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 (QEE). The earnings portion of all non-qualified withdrawals will be subject to income tax plus a 10 percent penalty tax is used for purposes other than a QEE. 

 

Coming soon 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. 

Please reload

Featured Topics 

October 5, 2015

Please reload

What's your question

What's your question

ning and digital money management tools, and custom investment management accessible on one dashboard 24/7. To advance her mission, Stacy & her daughter also volunteer teach girls in less developed countries, most recently in India. Stacy is an avid athlete, enjoys swing & cardio dance, and is a repeat visitor to the art museums and opera houses of the world. For the moment her love of international travel is trumped by visits to her daughter at college. 

 

Get in touch with Stacy:

Stacy@WomenInvestingNow.com

Connect with Stacy

  • Wix Facebook page
  • Twitter Social Icon
  • moneytipslogo_edited_edited.png
  • LinkedIn Social Icon