Saving for Education

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.)​

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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.