Your Accounts
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Y's Ways to Fiscal Fitness
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Personal Financial Planning
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To make sure you’re meeting your education savings goals with the
right plan, you want to consider these two different kinds of tax-advantaged
accounts: 529 plans and Coverdell Education Savings Accounts (ESAs).
Depending on your investing preferences and your savings goals, one or
a combination of these plans may be right for you.
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This chart shows how both options stack up in three areas: opening an account,
paying taxes, and changing parts of your account after you’ve started
contributions.
| Type of Account |
529 Plans |
Coverdell ESAs |
| Maximum
contribution per year |
Depends
on the plan, often more than $250,000
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$2,000
annual total from all contributors for each beneficiary |
| Income
restrictions |
None |
Once adjusted gross
income reaches $95,000 (or $190,000 for joint), right to contribute
begins to phase out |
| Uses
for account |
For
full tax benefits, money must pay for qualified higher education
expenses |
For
full tax benefits, money must pay for qualified education expenses,
including K-12 as well as higher education |
| Tax on earnings |
Tax deferred |
Tax deferred |
| Tax
on withdrawals |
Withdrawals
for qualified expenses are free from federal income tax and
sometimes state income tax. On nonqualified withdrawals, earnings
are taxed as income, plus a possible penalty. |
Withdrawals
for qualified expenses are free from federal income tax and
sometimes state income tax. On nonqualified withdrawals, earnings
are taxed as income, plus a possible penalty. |
| Can you change
the beneficiary? |
Can change beneficiary
to another member of the same family |
Can change beneficiary,
in most cases, to another member of the same family, as long
as new beneficiary is under 30 |
| Can
you change investments? |
Yes,
once every 12 months with most plans |
Yes,
any time |
| Can you reclaim
the money? |
Yes, but withdrawal
will be subject to income tax and penalty |
No, the money must
be used for the benefit of the child |
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SEPARATE YOUR GOALS
 Whatever
you decide to do, experts agree that you should keep your college savings
separate from your other investments. You’ll have an easier time
figuring out if you’re on track for your goal, and you won’t
be tempted to raid your savings to meet other expenses.
Remember: The same goes for your retirement savings. You may look at
the money you have saved for retirement and think that, because college
comes first, you should redirect those funds. In most cases, it’s
not worth it. Students can win scholarships and grants, but you won’t
get grants for retirement.
And if you withdraw early from a retirement plan, you’ll lose the
plan’s tax advantages, and you’ll have an income tax bill. It’s
an option, but more like a last resort.
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WHAT ABOUT US SAVINGS BONDS?
You can buy US savings bonds any time, for any reason, but you might
get a tax break if you redeem certain savings bonds to pay your child’s
qualified education expenses. To get that break, you, not your child,
must own the bonds, and your income has to fall under a limit set
by Congress the year you cash in the bonds. |
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OUTSIDE LINKS
studentaid.ed.gov
Read about the "Tax Break" for higher education at the Federal
Student Aid website's section on Funding.
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