If you're a parent, the prospect of paying for your child's college education may seem daunting. According to the College Board, the average cost of attendance as of the time of publication is $16,140 for students enrolled in a four-year public college or university and $36,993 for students enrolled at private institutions. Investing in a state-sponsored 529 plan or education IRA can help to offset higher education expenses while potentially offering certain tax advantages.
Who Can Contribute
The Internal Revenue Services (IRS) imposes different guidelines concerning who may contribute to an education IRA or 529 plan. As of the the time of publication, you can contribute to an education IRA, also known as a Coverdell Education Savings Account (ESA), if your modified adjusted gross income is $110,000 or less for single filers or $220,000 or less for joint filers. There is no income limit for contributions to a 529 plan and you may contribute to any state's plan, regardless of your actual state of residence.
Lifetime contribution limits for 529 plans vary. Depending on your state's plan, you may be able to contribute upwards of $300,000 or more. Under IRS rules, single filers may contribute up to $13,000 in a single tax year to a 529 plan without incurring any gift tax. The limit increases to $26,000 for joint filers. As of the time of publication, the IRS limits annual contributions to a Coverdell ESA to $2,000 regardless of filing status. You can no longer contribute to an education IRA once your beneficiary turns 18. There is no age restriction for 529 plan contributions.
Video of the Day
Brought to you by
Related pagescan a cosigner take your car postage stamps worth money how to unenroll from college non-formulary drugs definition stealing a credit card and using it ira maturity date powerball annuity vs lump sum mississippi first time home buyer grants when was fica established does car insurance cover stolen property where to sell e scrap hpr calculator are landlords responsible for noisy tenants bancorpsouth credit card online how to calculate a yearly salary per hour scottrade margin interest rate dividend discount model example how to cash a savings bond us bank clearing code w2 sec 125 military school in gainesville ga benefits calworks spelman university scholarships will insurance cover breast reduction surgery illinois link card phone number check nc state refund tips for pawning jewelry statute of limitations on debt ontario freddie mac first look program tn food stamp fraud florida deed of trust irs lien on house deficit financing definition how to remove eviction from record ugma vs utma medicare part b premiums tax deductible corporate bonds vs treasury bonds hospital pcu 2nd trust deed loans florida prepaid cancellation form paypal $1 fee at & t prepaid qualified and nonqualified dividends irs 8917 how atm machine works internally legit grants for single mothers 401k pre tax contribution limit northwestern mutual adjustable complife salvation army nj pick up barclays check balance nypd police cadet corps checking account for people in chexsystems vertical format of balance sheet perpetual preferred stock biotech dividend stocks overdrawn and overdraft hchd gold card application online florida intangible tax mortgage lotto lump sum calculator w-2 deadlines for employers mississippi tenant rights an easement in gross does homeowners insurance cover foundation repair how do pre approved auto loans work affidavit death of trustee food stamp office queens medicaid nevada qualifications donate washer and dryer request medical records from kaiser identity theft ohio ach ic payment evicting family members how to assume a va mortgage loss mitigation meaning speedy rewards credit card e trade corn futures tlc extreme couponing
Qualified Education Expenses
Funds held in a 529 plan may be used to pay for qualified education expenses at an eligible educational institution. An eligible educational institution is any college, university or school that can participate in federal student aid programs. According to IRS guidelines, qualified expenses include tuition, books, fees and room and board for students who are enrolled at least half-time. Computers are also covered if they are a requirement for enrollment. Contributions to a Coverdell ESA may be used to pay for higher education expenses or education costs associated with an elementary or secondary school. Qualified expenses include tuition, room and board, books, fees, uniforms, transportation, tutoring, computers, equipment and supplies.
Contributions to a Coverdell ESA are not deductible on your federal or state taxes. Depending on your state of residence, you may be able to claim a deduction for contributions to a 529 plan. Distributions from both an education IRA and a 529 plan are tax-free as long as the funds are used to pay for qualified education expenses. If you withdraw funds for purposes other than education expenses, you must pay regular income tax on earnings as well as a 10 percent tax penalty. You must use all funds held in a Coverdell ESA prior to the beneficiary's 30th birthday in order to avoid a tax penalty. There is no distribution requirement for 529 plans.