College Savings
Coverdell Educational Savings Accounts
After-tax money is contributed to a Coverdell ESA and grows tax free. However, only $2,000 per year can be put into a Coverdell without an additional 6% tax penalty, and you cannot contribute to a Coverdell if your income exceeds $110,000 ($220,000 if you are married filing jointly). Contributions can only be made until the beneficiary is 18.
Money in a Coverdell ESA can be used to pay for tuition, books, fees,
and supplies at any K-12 institution or postsecondary educational institution. Money can be used for room and board as long as the beneficiary is at least a half-time student. Any distribution, unless it is the principal, that is not used for a qualified education expense is taxed as earned income plus a 10% penalty.
529 Plans
529's are college savings plans offered by state governments or educational institutions. There are two types of 529s.
529 Prepaid Plans- Under these plans, tuition credits are purchased at today's rates from a state government. These can be used in the future regardless of future tuition rates. However, tuition credits can only be used at a state school in the
state where the credit was purchased. Illinois, Florida, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington all of 529 prepaid plans.
529 Savings Plans- In these plans, after-tax money is contributed and grows tax free. Money can only be contributed up to an amount that is needed to pay for qualified education expenses. Money in a 529 Savings Plan can be used to pay for tuition, books, fees, and supplies. It can also be used for room and board as long as the beneficiary is at least a half-time student. Money taken out of a 529 Savings Plan that is not used for a qualified education expense is taxed as earned income, plus a 10% tax penalty. However, like Roth IRA's, the principal can be taken out without a tax penalty.
The beneficiary of a 529, regardless of which type it is, is transferable. There are also no income limits for contributing to a 529. Additionally, there is no limit on the number of 529's you can create. However, contributions are not tax deductible.
Colleges and Value
Money has evaluated 1,500 colleges based on educational quality, affordability, and alumi earnings and provides a list of the best colleges for the money. Check it out here.
Money has also created a list of the 25 public colleges where students graduate fastest. Check it out here.
If you haveany questions or would like to learn more about college savings, please contact us.