What is the best way to save for private school expenses? A 529 plan, a Coverdell ESA or a mutual fund?

By Denise Appleby AAA
A:

If the goal is to put the money in the plan towards private school expenses, then the Coverdell Education Savings Account (ESA) appears to be the better choice, because the earnings are tax-deferred and will be tax-free if distributions are used for eligible education expenses, which includes expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Private schools are considered eligible education institutions for an ESA, but eligible institutions for the 529 plan are limited to college, university, vocational school, or other post-secondary educational institutions eligible to participate in a student aid program administered by the Department of Education.

Bear in mind that the maximum amount that may be contributed to an ESA on behalf of any designated beneficiary is $2,000 per year.

As for putting the money in mutual funds, earnings on the mutual funds may be taxed in the year earned.

Other options are explained in IRS publication 970, available at www.irs.gov. To locate this publication, enter ‘970' in the second search bar and click on the ‘enter' button.


This question was answered by Denise Appleby
(Contact Denise)

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