Last week I explored the topic of whether paying for your child or grandchild’s education was the right thing to do. This week let’s look at some of the better ways to help fund these soaring education costs.
As you are probably aware, education costs are not only rising for college, but for K-12 as well. Tutoring, special classes, tablets, and outside testing are becoming more prevalent. There are two primary types of investment accounts that will allow you to grow and withdrawal money tax-free for qualified educational expenses, the most popular one is the 529 Savings Plan. The lessor known, but more flexible one is the Coverdell Education Savings Plan.
My preferred choice is the Coverdell ESA. It has a longer list of qualified expenses you can make use of. Beyond tuition costs, the Coverdell ESA allows academic tutoring, books, computers, software, supplies, room and board, uniforms, transportation, and more. Another key benefit is to use it for elementary education expenses.
The Coverdell ESA does have some limitations for this benefit. The max contribution is limited at $2,000 per year. The income limit allowed to use this account is $190,000 for married couples, and $110,000 for single filers. This does limit those who can use it, and the upside benefits. However, it is perfectly legal to have a grandparent or someone you trust contribute to the account for your child’s benefit.
An example of the benefit you might receive is if you saved $2,000 at the beginning of each year for 10 years earning 5% return, the balance would be $26,413. The same example for 18 years would put the account over $59,000. Not bad for only putting in $36,000.
529 Plans are not as restricted on contributions and they have no income limits. Their max contribution is well beyond most people’s scope at $325,000. It’s common for grandparents to contribute $15,000/year as this falls under the gift tax exclusion. You do receive a nice state tax deduction with 529 contributions. This can add up to almost $500 for individuals, and $1000 for a married couple in net benefit at the maximum allowable tax deductions.
The limitation as compared to the Coverdell ESA is that you can only use the proceeds of the account towards tuition in K-12; think private school. However, you can use the account for most of the qualified expenses I listed for the Coverdell ESA for college education.
There are some more nuances like how to handle the funds if your child doesn’t go to college that would entail a longer article. I recommend using both accounts in conjunction if you have the ability. For more information on these and other accounts, please contact me at ajpickert@stewcap.com.