Tax Strategies & Credits

Saving for School Just Got A Whole Lot Easier

by
Bob Mason
on
5/16/2018
Saving for School Just Got A Whole Lot Easier

Over the last several years, there have been two tax-advantaged savings plans available for educational savings: The Coverdell plans and 529s, or Qualified State Tuition Plans. Though both are intended to encourage people to save for higher education through the incentive of tax-free earnings, they are very different in their details.

The big similarity between the Coverdell plan and the 529 plan is that the federal government does not allow depositors to either type of account to deduct contributions on their income tax return (your state may provide a tax deduction for these contributions), and both plans’ earnings are tax free as long as they are used for what they are intended – education expenses at qualified institutions.  

The big difference between the two has been in the amount that can be deposited each year. For 529 plans, the maximum amount that can be contributed is limited only by the cost of attending the specific state’s highest cost university and the individual contributor’s tax exclusion amount ($15,000 in 2018); multiple people can make contributions each year. For Coverdell plans, the limit is $2,000 per year, no matter how many people contribute. Clearly, much more money can be accumulated in 529 plans, though both types of accounts can be opened for the same student.

In addition to the total amount that can be contributed, the other difference between Coverdell accounts and 529 plans is that up until the passage of the tax reform act, 529 plan dispersals could only be used to pay for post-secondary education, while Coverdell accounts, though limited to $2,000 per year in contributions, could be used to fund education from kindergarten on.  As of 2018, that has changed, and up to $10,000 of funds held in 529 plans can also be used for elementary and high school educational expenses. Further, the dispersals are now able to be used at a broader range of schools, including private and religious schools.

The greater freedoms allowed for the use of 529 plans will make educational expenses easier to bear for those who take advantage of the new allowances, but it is important to remember that the changes may not apply to your individual state’s tax codes. If you live in a state where 529 plans are still defined as only being able to be used for college, you may lose your ability to consider those dispersals tax free for state taxes. To make sure that you are acting wisely in taking dispersals from a 529 or Coverdell account, check with your tax professional.

Bob Mason, CPA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].

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Bob Mason

Bob Mason

Bob Mason is the founder of Coast Financial Services Inc. servicing both the Santa Cruz, and San Jose areas. Bob Mason is a skilled financial professional who is fully equipped to assist any of your accounting needs. Founding his firm in Santa Cruz, Bob understands the importance of small businesses and how they form the backbone of the area. Coast Financial Services, Inc. has been dedicated to the growth and profitability of businesses in Santa Cruz for 17 years. To learn more about Bob Mason and the rest of his team, visit their website.

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