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Education Savings Accounts
A child’s education is paramount to their success in life. But paying for this lifelong investment can be costly, and the costs are constantly increasing. It’s never too early to start saving for your kids’ future, and opening an account to save for college can help you with this journey.
Coverdell Education Savings Accounts (ESA) and 529 plans are designed for the specific purpose of paying for a student’s education expenses. Funds in a specialized education account have the opportunity to grow tax-deferred, which means the sooner you start saving, the more opportunity there will be for your investment to increase.
Coverdell Education Savings Account
As with many investments, a Coverdell ESA is subject to a range of regulations that a Financial Advisor or tax professional could discuss in more depth. In a Coverdell ESA, contributions are made post-tax and any accumulated growth is tax-free for qualified distributions. Additionally, when a student applies for financial aid, any funds held in the Coverdell ESA may be excluded from the calculation of financial aid; as noted above, a Financial Advisor or tax professional could also assist with these calculations. Also with a Coverdell ESA, the money you save in the account can be used for qualified education expenses from elementary school through higher education (such as college).
Coverdell ESA qualified education expenses include:
- Tuition and fees
- Tutoring
- Transportation
- Uniforms
- Room and board
- Supplies and equipment
- Special needs services
- Books
- Computers
Managing a Coverdell Education Savings Account
There are many things to keep in mind when selecting a Coverdell ESA. First, contributions can only be made until the beneficiary turns 18, and the current maximum annual contribution is $2,000. These contributions can only be made in cash. The beneficiary is also required to take all distributions by age 30. You can transfer any remaining money in the Coverdell ESA to a Qualified Tuition Program, such as a 529 plan, for the same beneficiary, or to an ESA of an eligible family member, such as another dependent minor.
Are You Eligible?
To be eligible to contribute to a Coverdell ESA, your modified adjusted gross income (MAGI) for the year must be less than $110,000. For married couples filing a joint return, your MAGI must be under $220,000; note that both of these limits can change annually. Anyone can make contributions to the Coverdell account, including the child who is the beneficiary of the account, their parents, grandparents or other relatives, provided they are eligible according to their MAGI.
To open a Coverdell ESA with Delta Community Credit Union, please contact our ESA Specialists at 404-677-4600.
529 Plan
Note that another option for saving for college is a 529 plan. These savings plans are sponsored by states, state agencies or educational institutions. This means that Delta Community does not offer a 529 plan, but since they can be a valuable college savings tool, we do offer our members information about their advantages and instructions on how to apply for a 529.
Tax rules and exemptions for 529 plans vary by state, so before committing to a 529 plan, you should find out what rules apply where you live.
529 plans have a much higher contribution limit per year and there is no beneficiary age limit for contributions. Distributions can be used for many types of items for school, including tuition, fees, room and board, books, and other supplies. These distributions may be used at most colleges and universities in the United States. Distributions from a 529 plan can also be used for private school tuition in kindergarten through 12th grade, but only up to $10,000 per year.
If you’re interested in Georgia State 529 plans, visit Path2College 529 Plan.
If you’re looking for more information on how to save for your children’s education, visit SavingForCollege.com.
Consult your tax advisor.
