Saving for education costs (both college and K-12 private school tuition) is a major financial goal for many families. Two of your options include 529 programs and Coverdell Education Savings Accounts. Here are some important facts and guidelines for both.
529 College Savings Programs
There are two main types of 529 programs – college savings plans and prepaid tuition plans – and each state plan has its own terms and features. The specifics of each plan vary greatly. So before you sign on, get the details about the investments, fees, and restrictions of the state plans you’re considering. Go to www.collegesavings.org to find out more about 529 plans.
In general, 529 plans don’t have any eligibility income limitations. Any adult – parents, grandparents, other relatives, and friends – can open an account and name a beneficiary.
College savings plans allow you to save money in a special college savings account for a student’s qualified higher education expenses at any eligible educational institution.
Qualified higher education expenses include tuition and fees, books and supplies, and room and board for students enrolled at least half time.
Coverdell Education Savings Accounts
You can contribute up to $2,000 per year to an education savings account per child under age 18. Although contributions aren’t tax deductible, earnings accumulate tax deferred and withdrawals to pay qualified education expenses are free from federal taxes.
Qualified higher education expenses include undergraduate and graduate tuition, fees, books, supplies, equipment, and services for special needs beneficiaries required for attendance at eligible education institutions. Some room and board expenses also qualify if a student attends college at least half time.
Qualified education expenses also include qualified public and private elementary and secondary education expenses. Specifically, this includes expenses incurred while the beneficiary is in kindergarten through 12th grade at a public, private, or religious school.
If your child doesn’t attend college, you’re allowed to roll the account over to other members of your child’s family who are under age 30, without triggering taxes or penalties. Any money remaining in the account at the time your child turns 30 must be distributed (except for special needs beneficiaries). If the money isn’t used for educational purposes and is distributed when your child turns 30, the earnings will be included in your child’s gross income and subject to income taxes, as well as a 10% tax penalty (there are some exceptions).
This article is not intended as tax advice. Obtain appropriate professional advices regarding your circumstances.
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