.png)
Many of us parents dream of having our children go to college, study a field they are passionate about, and watch them graduate and succeed. But unfortunately, the high costs of college education make it nearly impossible for many students to attend. Instead, they either drop out or end up with vast amounts of student debt once they graduate. Often, students take multiple side gigs on top of their full-time jobs to pay off their student debts, and even so, it may take years to pay them off completely. A way to assist your child pay for college tuition and prevent them from incurring student debt is by saving early through a 529 plan or Coverdell ESA.
The costs of a college education continue to increase exponentially, and many young students are the ones to pay the price. FinAid.org says, “… tuition rates will increase at about twice the general inflation rate”. The inflation rate is almost 10% right now. Does that mean that the cost of college will go up by 20% next year? I hope not.
Nevertheless, we must start saving early. There are many options to save for a college education. Still, there are special accounts exclusively for paying education costs, which are called 529 Plans and Coverdell Education Savings accounts.
529 plans and a Coverdell ESA offer the same function. After-tax contributions are deposited into the account and invested for a period, and earnings are tax-deferred if used for college purposes. However, here are some differences between the two:
529 Plans
$16,000 limit per year per individual. The $16,000 qualifies for the gift tax exemption.
Can contribute a maximum of $80,000 upfront without gift tax consequences.
There are no income restrictions on the contributors.
529 Plans have a lower rate when determining the expected family contribution if the student applies for FAFSA.
Some states offer tax deductions on 529 contributions.
Funds are subject to the 10% penalty if not used for educational purposes.
Coverdell ESAs
2,000 limit per year per child.
Only individuals making less than $110,000 or married couples making less than $220,00 can contribute.
Contributions must be made on or before the beneficiary turns 18.
Funds must be distributed by the beneficiary’s 30th birthday.
Funds are subject to the 10% penalty if not used for educational purposes.
Comments