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. 

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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. 

 

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