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Education Savings 101: Understanding the Differences in Tax-Advantaged Education Savings Plans

by
Gordon W. McNamee
on
1/6/2016
Education Savings 101: Understanding the Differences in Tax-Advantaged Education Savings Plans

Whether you are a student, a parent, a grandparent or anybody who has an interest in contributing to a child’s education, it is important for you to be familiar with both the Coverdell Education Savings Account and the Qualified State Tuition Programs that are frequently referred to as 529 plans. Both of these offer tax-advantaged savings opportunities geared specifically towards paying for education, and there are similarities between the two: Both allow earnings to grow and be withdrawn tax free when used for allowable expenses such as tuition, and neither provides tax-deductible contributions. While for both funds, it is a good idea to begin saving as early as possible in a child’s life in order to maximize the earnings opportunity of the fund, there are significant differences between the two programs that may determine which one meets your needs the best.

Coverdell Education Savings Account

When a Coverdell Education Savings Account has been set up for the benefit of a child’s education, funds can begin to be withdrawn for expenses as early as kindergarten. The funds are available to pay for allowable expenses including tuition, room and board, books, supplies and travel expenses through the student’s post-secondary education years, and for special needs students the monies can be withdrawn until the child reaches the age of 30. Special needs students are also granted tutoring as an allowable expense. The maximum amount that can be contributed into a Coverdell account each year is $2,000, and the contributions can be made by anybody as long as their married adjusted gross income is less than $190,000 or single whose adjusted gross income is less than $95,000: at these points a phase-out threshold is encountered. Though there are apparent advantages to being able to use these funds to pay for tuition for a grade-school child, it is questionable as to whether the earnings that have accumulated over a short period of time will be substantial enough to make doing so beneficial.

State Qualified Tuition Plans (529)

When a State Qualified Tuition Plan account has been set up for the benefit of a child’s education, funds cannot be used until the child enters post secondary education. The allowable expenses are similar to those in the Coverdell Education Savings Account, and generally include tuition, room and board, and school supplies including books. There is no limit on the amount that can be deposited into a 529 savings plan in any given year short of the gift tax limit that is imposed on each contributor. For the year 2015, the gift tax limit (which is periodically adjusted for inflation) was $14,000, though a special rule has been established that permits five years’ worth of contributions to be made to a 529 account by a single individual in one year. There is no limit to how many people contribute to a 529 account, though the accounts themselves have individual maximums that are established based upon the projected costs of college. Whatever the established maximum, once it is reached no more contributions can be made, though the account will continue earning interest. In most cases 529 limits are above $200,000, with some nearly doubling that amount.

Paying for a child’s education is an important goal, but doing it in the way that offers the most advantage is dependent upon each individual circumstance. For guidance in making this decision, talk to a tax professional today.

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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