Coverdell Education Savings Accounts (ESAs) & 529 College Savings Plan

Plan for College Tuition – and Let Uncle Sam Pitch In!

With a four-year Ivy League education costing nearly $175,000* and one year at a public institution averaging $12,796 in tuition, fees, room and board,** saving for college may seem overwhelming. Fortunately there are several tax-advantaged savings alternatives available that may help you get a head start on your child’s or grandchild’s education expenses.

Coverdell Education Savings Accounts (ESAs)
Coverdell ESAs allow you to save money for qualified education costs, including eligible elementary, secondary and higher education expenses, on a tax-deferred basis. If the money is used for qualified expenses, it may be withdrawn tax-free.

Anyone meeting income eligibility requirements may contribute to the account on behalf of the beneficiary. Contributions are phased out for incomes between $95,000 and $110,000 (single filers) or $190,000 and $220,000 (married filing jointly).
A beneficiary may have more than one Coverdell ESA, but annual contributions are limited to a total of $2,000 to all accounts from all sources for each beneficiary.
There are generally more investment options available than with a 529 savings plan (see below).
The designated beneficiary must be under the age of 18 when the account is established, and the balance must be distributed within 30 days after the date the beneficiary reaches age 30.*** These age limits do not apply to beneficiaries with special needs.

529 Savings Plans
These plans are generally sponsored by individual states, but you may enroll in any state’s 529 plan regardless of where you live.† There are no income eligibility limits to contribute to a 529 plan – anyone can contribute to a 529 plan on behalf of the beneficiary. Other features and benefits of 529 savings plans include:

Distributions for qualified higher education expenses are tax-free.***
Maximum contribution amounts vary by state but are quite generous, exceeding $250,000 in some cases. Contributions may be made over time or all at once.
Each plan offers specific investment options, and many offer age-based portfolios that automatically shift assets from more aggressive to more conservative investments as the child nears college age.
The owner of the account – not the beneficiary – retains controls of the account.
Most states do not require the money to be distributed by a certain age.
If the beneficiary receives a scholarship, unused money may be withdrawn without paying a penalty. However, the distribution will be taxable.

Another type of 529 plan is the prepaid tuition plan. These plans let you lock in future tuition rates at in-state public colleges at current prices. Contribution limits are generally lower than 529 savings plans and the plans limit your choice of higher education institutions. However, they are usually lower-risk investments than 529 savings plans. If your child does not attend college, the money may be withdrawn, but there may be a fee.

Want more information on 529 Plans? Read our 529 Plan Frequently Asked Questions

Save Early and Often
The best chance of saving enough money for college is to start when your children are in diapers. Long-term compounding has the potential to make even small amounts grow significantly over time.

For more information on any of these programs please contact Jack Crane, at 629-1518 or jack.crane@uvestmail.com.

* Source: Harvard University, www.harvard.edu.
** Source: “Trends in College Pricing 2006,” The College Board, www.collegeboard.com.
*** Undistributed amounts may be rolled over tax-free to an account for an eligible relative of the beneficiary. Otherwise, distributions will be taxed at ordinary income tax rates and a 10% tax penalty may apply.
† There may be state tax benefits available to residents of the 529 plan’s state that are not available to residents of other states.

Securities are offered by UVEST Financial Services, Member FINRA, SIPC. Investment Advisory Services are offered by UVEST Financial Services, an SEC registered investment advisor. UVEST and St. Mary's Bank are independent entities. UVEST financial consultants do not offer tax advice. For tax advice please refer to a qualified tax proffesional. This site is designed for U.S. residents only. The services offered within this site are available exclusively through our U.S. registered representatives. UVEST Financial Services’ U.S. registered representatives may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state.

As with all tax-related decisions, consult your tax advisor. Withdrawals for expenses other than qualified education expenses are subject to income tax and an additional 10% penalty on earnings. You should consider a 529 Plan's fees and expenses such as administrative fees, enrollment fees, annual maintenance fees, sales charges, and underlying fund expenses, which will fluctuate depending on the 529 Plan invested in and the investments chosen within the plan. You should also consider the inherent risks associated with investing in 529 Plans such as investment return and principal fluctuation, which will also vary based on the investments made within the plan. More information is available in each plan’s official statement. The official statement should be read carefully before investing.