Next Step Tax & Accounting
  • Clients
    • Portal - Log In
    • Portal - Instructions

Blog

Saving for Education

6/19/2017

 
Picture
There are a plethora of plans and a multitude of methods to save when it comes to education expenses. This article will focus on the two big savings opportunities: 529 Qualified Tuition Programs and Coverdell Education Savings Accounts.
529 Plans (so named for Internal Revenue Code Section 529)​ are the most common savings plans for education, but there are reasons to consider a Coverdell. First, here is a list of some similarities.
  • No federal income tax deduction is allowed for contributions (though states may offer one).
  • Contributions for the account beneficiary are considered a gift. (Gift tax rules may come into play.)
  • Earnings can grow tax-exempt.
  • Distributions for qualified education expenses (QEE) are federally tax-exempt (though states may not be).
  • QEE must be for the account beneficiary only.
  • QEE includes tuition and fees; books; supplies and equipment; computer and internet service; room and board if enrolled at least half-time. (Tuition, fees, supplies, and equipment must be required for enrollment or attendance at an eligible education institution.)​
​
While there are many similarities in the plans, here are a few of the significant differences.
 
529 Qualified Tuition Plan
Coverdell Education Savings Plan
Contribution Limits
No annual limit (but most states have a balance limit of $200,000-$500,000).
Max ​$2,000 annually.
Qualifying Education
Undergraduate and graduate.
​K-12, undergraduate and graduate.
Investment Control
None. You select the plan to contribute to, and the plan controls the investment.
Much. You can customize your portfolio, choosing your own investments.
Beneficiary Age Limit
None.
Contributions aren't allowed after the beneficiary reaches age 18 and the account must be closed when the beneficiary reaches age 30 (special rules apply for special-needs beneficiaries).
Phase Out
None.
Contributions are allowed unless income exceeds certain limits. The 2016 phase-out amounts were $190,000-$220,000 for MFJ and $95,000-$110,000 for others.
Plan Type
Savings or prepaid tuition.
Savings only.
Contribution Deadline
Plan must be open and contributed to (generally) by the end of the calendar year. (Check with state).
Plan may be opened and contributed to until April 15 for prior year contributions.
While there are limits on Coverdells that don't apply to a 529, the ability to choose your investments, to use plan funds for elementary and secondary school expenses, and the April 15 opening and contribution deadline can make them quite desirable. This is especially true since expenses typically deemed nondeductible, such as private school or computer/internet expenses, can be paid for from the plan. So if you have young children and are setting aside for education, consider making contributions to both a Coverdell and a 529 plan.

Comments are closed.

    Next Step Blog

    Our blog is intended as a tool to keep people informed about relevant tax and accounting issues. If you have a question or an idea for a post, let us know!

    Categories

    All
    Audits
    Capital Assets
    Deductions
    Due Dates
    Education
    Employees
    Fraud & Scams
    Income
    Insurance
    IRS Code
    Management
    New Legislation
    Payroll
    Planning
    Refunds & Payments
    Sales Tax
    Tax Deferral
    Tax Forms

    Archives

    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016

    RSS Feed

Copyright © 2023
Picture
  • Clients
    • Portal - Log In
    • Portal - Instructions