Saving for college tuition can always be a scary and overwhelming process. Oftentimes it seems as though when it comes to college-saving vehicles, 529s are the only game in town. However, that’s not the case.
When thinking about saving for college tuition, it’s important to consider other options as well. Coverdell Education Savings Accounts (ESAs) are similar to 529s in the sense that they are a tax-favored way to save for education expenses. Both types of accounts allow assets to grow tax-free when distributions are used to cover qualifying expenses.
But ESAs have a nice additional feature that 529s lack: They offer more flexibility in investment choices than 529s. ESAs can be invested in stocks, bonds and mutual funds, while 529s are limited to mutual funds.
Accounts are typically set up at mutual-fund companies, brokerage firms or banks by parents and grandparents, who then make nondeductible cash contributions to the accounts.
There is an overall $2,000 annual limit on contributions to all ESAs for the benefit of a particular child. A beneficiary may owe a 6% excise tax every year that excess contributions are in his or her ESA.
There are limits that can discourage investors with large incomes from setting up an ESA. Those filing joint returns must have less than $190,000 in modified adjusted gross income ($95,000 for single filers) to make the $2,000 maximum contribution. The maximum is phased out for joint filers with a modified adjusted gross income falling between $190,000 and $220,000 (between $95,000 and $110,000 for single filers). Once set up and properly funded, however, the assets grow tax-free, just as they do in a 529, and offer tax-free distributions as long as the money is used for qualified educational expenses.
As a result of the pandemic, both 529s and ESAs have benefited from a broadened interpretation of what constitutes qualified expenses. In this era of increased remote-learning, costs for such items as computers and peripheral equipment, software and internet access are now typically allowed in addition to tuition, books and fees.
“Coverdell is a way to cover these costs,” says Mark Kantrowitz, publisher of www.Savingforcollege.com , a website that provides information on college savings plans. “As long as the costs are reasonable.”
An additional benefit of an ESA: If a person received a military death benefit from Servicemembers’ Group Life Insurance, all or part of the payment can be rolled over to an ESA for a member of the beneficiary’s family. These distributions are an exception to the $2,000 annual limit rule, meaning any amount can be rolled over to an ESA. The military death benefit can also be rolled over to a Roth IRA.So, as you can see there are other attractive options when it comes to saving money for your children’s tuition. Both 529 plans and ESA’s are great ways to put money aside and save for college tuitions. Keep in mind the importance of saving often as well as saving early when starting to plan out your future. If you have any questions, please reach out to use at email@example.com or schedule a free 30-minute consultation on our website. For more information and tips, check out our other blogs as well.