Saving for College

Coverdell Education Savings Accounts (ESAs)* and 529 plans** can be key to helping lower the cost barrier to college for many students.

Coverdell ESA

If you qualify by income limits, you can contribute up to $2,000 annually to the Coverdell ESA for qualified education expenses for college, elementary and secondary schools. Contributions are not tax-deductible.

The ESA’s beneficiary must be under the age of 18 or a special-needs student to qualify, and all money must be distributed when the beneficiary reaches age 30, unless the student has special needs. You can keep the money, however, by changing the beneficiary to another student under 30. Potential earnings are tax-deferred and distributions are income tax-free up to the amount of qualified education expenses incurred. You can’t make contributions, though, for beneficiaries once they reach 18.

529 Plan

If you’re looking to put more money away, check out a 529 plan. This plan lets you prepay for a specific institution or contribute to an account that pays for a student’s qualified education expenses at any postsecondary institution. States establish their own 529 savings plans, each with their own contribution limits (which can be high), while eligible educational institutions can establish prepaid plans.

Potential earnings in a 529 plan grow tax-deferred and qualified distributions are tax-free. While contributions aren’t federally tax-deductible, some states may allow a deduction, and there are no income restrictions.

Anyone can contribute up to $15,000 per individual and $30,000 per married couple filing jointly per year to a 529 plan, free of federal gift tax. You can also bunch contributions into one year up to the maximum of $75,000, but then you can’t contribute anything else in the subsequent four years.

* https://www.irs.gov/pub/irs-pdf/p970.pdf
**Certain requirements may apply. Before investing, consider the investment objectives, risks, charges and expenses associated with 529 plans. Read the program offering statement before investing. 529 plans are not guaranteed by any state or federal agency. Consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 plan. Discuss 529 tax rules with your tax professional.