Unless you’ve actually been talking to a CPA about education expenses, or if you work in the financial field itself, you might not know about 529 college savings plans. However, you got to this article somehow, possibly by googling keywords like “education savings” so you’re probably looking for some sort of general information about education savings plans, so to continue: 529 plans are named after Section 529 of the Internal Revenue Code, and as the “college savings plan” part of the name suggests, they’re used to save for college.
There’s an even lesser known option that was established in Section 530, which instead of being called a “530 plan” usually goes by the catchy name Coverdell Education Savings Account.
There are a few big differences between a Coverdell Education Savings plan and a 529 plan, although both are established to help you save for education expenses.
First, Coverdell plans aren’t just for college. Coverdell plans can be used from kindergarten to college, and can be used to pay for a variety of educational materials along the way. Computers, books, and room and board are all things that Coverdell plans can be used for in additional to tuition.
Second, contributions to a Coverdell plan aren’t tax deductible, but money earned inside of one is tax free. So, you’re normally limited to contributing $2,000 each year to a Coverdell plan, but if you invest the money in these accounts wisely, the earnings that your investment gains won’t be taxable. In this specific sense, these accounts are a bit like Roth IRAs.
Third, anyone can contribute to a Coverdell education savings account, including trusts and corporations, can contribute to the account until the child turns 18. Additionally, if the trust is established for someone with special needs, there’s no age limit at all.
Generally you can establish a Coverdell education savings plan for a person under the age of 18, even if that person isn’t necessarily your child. Since these plans are generally very flexible, they might fit your needs better than the standard 529 plan, especially if the money is sitting around in your savings and you’ve already paid taxes on it in years past.
If you’re looking for more information on educational savings plans, or other ways to put aside money for the future, or if you just want a second opinion from your financial planner, think about contacting us.