Smart Saving for College—Better Buy Degrees
Unless Congress takes action, certain provisions of the Coverdell will expire at the end of 2012. Specifically, the current $2,000 contribution will fall to $500, and expenses for K-12 will no longer be allowed.
Those who want more investment choices may want to consider Coverdell Education Saving Accounts (ESAs). Also known as Education IRAs, ESAs are another tax-advantaged way to save for college. Unlike 529 plans, your investment options are virtually limitless. Except for investing in life insurance contracts, you can buy and sell what you want whenever you want. Also, you can set up ESAs at almost any brokerage firm, mutual-fund company or other financial institution.
Federal Tax Advantages
As with 529 plans, contributions are not deductible, but earnings in ESAs are tax-deferred, and withdrawals that are used for qualified education expenses are tax-free.
Education Expenses Covered
One advantage that ESAs have over other tax-advantaged saving options is that you can make tax-free withdrawals to pay for private elementary and high school expenses, as well as post-secondary school expenses. So if a private school is in the future, one option you might want to consider is saving for that expense in an ESA and using a 529 plan for college.
ESAs have two annual contribution limits for individuals. If you exceed them, you will be subject to a 6 percent excise tax.
First, the total of all contributions to all ESAs set up for one beneficiary cannot exceed $2,000. If other family members set up ESAs for your child, you need to check with them to make sure you do not go over the limit.
Second, your income must fall within IRS limits. Generally, as your modified adjusted gross income approaches the income limit, the amount you can contribute to an ESA decreases:
|Filing status:||You can make the
contribution will be
make an ESA
|Single||Your modified adjusted gross income is $95,000 or less.||Your modified adjusted gross income is between $95,001 and $110,000.||Your modified adjusted gross income is more than $110,000.|
|Married filing jointly||Your modified adjusted gross income is $190,000 or less.||Your modified adjusted gross income is between $190,001 and $220,000.||Your modified adjusted gross income is more than $220,000.|
|Figuring Your ESA Contribution Limit
If your Modified Adjusted Gross Income (MAGI) is between $190,000 and $220,000 (joint filers), or $95,000 and $110,000 (single filers), you can figure your ESA contribution limit by using the following equations:
Married Joint Filers
$2,000 – (MAGI – $190,000) x $2,000 = Contribution Limit
$2,000 – (MAGI – $95,000) x $2,000 = Contribution Limit
Organizations, such as corporations, can also contribute to ESAs and are not subject to any income limits. For more information, see IRS Publication 970.
Fees, Charges and Expenses
Fees, charges and expenses will vary depending on the investments you choose and the institution with which you open an ESA. Remember, however, that because of the fairly low contribution limits, even small annual fees or expenses could make a big difference in the value of your investment over time.
Download the print version:
FINRA Investor Podcast, Smart Saving for College—Part 1: 529 Plans
FINRA Investor Podcast, Smart Saving for College—Part 2: Other Tax-Advantaged Options