Can I Fund a 529 Plan and a Coverdell Education Savings Account?
A taxpayer can fund both a 529 plan and a Coverdell Education Savings Account. The two education savings instruments are designed to encourage education savings through tax-friendly treatment of gains and distributions. A Coverdell Education Savings Account is geared toward the cost of a primary education, while a 529 plan is designed to meet college and graduate school tuition costs.
Other People Are Reading
-
Coverdell Education Savings Account
-
The Coverdell Education Savings Account (ESA) allows for a nondeductible $2,000 yearly contribution for tuition from prekindergarten through the end of high school. The contribution is for a child 18 or younger. The benefit of this account is that earnings and withdrawals are not taxed. Funds may be applied for tuition, tutoring, books, uniforms and supplies. If there are remaining funds after the student graduates, the Coverdell funds can be applied to college expenses. However, the student must be enrolled at least part time. The account must be completely distributed by the student's 30th birthday. Any remaining funds can be transferred to a younger beneficiary.
529 Plan
-
A 529 plan is designed to save money for college and graduate school. According to the Securities and Exchange Commission, 529 plans consist of both prepaid tuition plans and college savings plans. Every state and the District of Columbia sponsor a 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan. The major benefit of 529 plans is that contributions are deductible for state taxes and earnings grow tax-free.
-
Impact on Financial Aid
-
Prepaid tuition plans, 529 plans and Coverdell ESAs usually reduce the amount of financial aid for which a student is eligible. Colleges vary on how they treat the assets in these accounts. Some colleges reduce aid on a dollar for dollar basis according to the amount of funds in the plans. Others colleges do not reduce aid as drastically. Federal aid programs treat the funds held in these accounts as parental assets. This is important because they add to what the federal government expects a family to be able to contribute toward college tuition.
Warning
-
Some 529 plans have high fees and poor performance. The tax advantages of poorly performing plans may be dwarfed by fees and portfolio losses. In addition, parents should look at rebalancing a portfolio over time. As the child nears college age, it is important to preserve capital by moving from risky investments to safe investments. Parents should be aware that withdrawing funds for non-qualified expenses incurs stiff penalties.
-
