Retirement and College Savings Plans - College Savings Plans


Coverdell Education Savings Account (ESA)
The Coverdell ESA, also known as the education IRA, was created in 1998 to give parents a tax-advantaged account in which they could save money for a child's college education. Anyone who has an adjusted gross income that falls within the government limits may contribute a maximum of $2,000 per year into an account that is established for the benefit of ("FBO") the child. The AGI phase-out for single parents is $95,000 to $110,000 and it is $190,000 to $220,000 for married parents.

While contributions are not tax deductible, the money within the Coverdell ESA grows tax-deferred and is tax free if used for qualified educational expenses at an institution of higher education, including tuition, room and board, and other related costs. The money must be used by the beneficiary's thirtieth birthday or it must be distributed and subject to ordinary income tax and a 10% penalty on the earnings. The same restrictions also apply to any non-education related withdrawals made before the beneficiary's thirtieth birthday.

With the increasing costs of education, these instruments have become increasingly popular with parents. Learn more about these accounts within the following Education Savings Account tutorial.

Section 529 Plans
In the last few years, one of the most popular accounts has been the Section 529 plan, known to most investment reps as simply a "529". The federal tax treatment of state-run 529 plans was modified by the Economic Growth and Tax Relief Reconciliation Act of 2001 to allow for federally tax-free treatment of qualified withdrawals. In other words, if contributions to 529 plans were used for qualified educational expenses, such as tuition, room and board, books, lab fees, and other education-related costs, any earnings and gains on the principal amount invested was free of federal income taxes.

Each state determines the specific rules that govern contribution amounts, investment choices and state tax deductibility. In addition, a state may have two or more state-sponsored 529 plans, each administered by a particular investment company. Parents can construct a mutual fund portfolio based on the child's age, an assortment of pre-selected asset allocation models developed by the fund company, or their investment representative's recommended fund choices. Earnings and capital gains are reinvested in the funds and grow tax-deferred as long as they remain inside the account, and they come out free of federal taxes if used for qualified educational expenses. Lifetime contribution amounts per beneficiary can be as high as $255,000 in some states. While contributions are not federal-tax deductible, some states allows state income tax deductions for residents.

Two of the main benefits of the 529 plan involve ownership and beneficiary designations. Unlike custodial accounts, where the child gains custody of the money in the account upon reaching the age of majority, the parent, grandparent, distant relative or family friend can start a 529 as owner, for the benefit of a child. If the child decides not attend college, the person who started the 529 can switch the beneficiary designation to another child or even use the funds for his or her own continuing education. Any withdrawals from the 529 that are not used for qualified educational purposes are taxed as ordinary income and subject to a 10% penalty.

If you would like to have a little more information on 529 plans, consult the 529 Plans tutorial.

Before recommending a particular 529 plan to a client, be sure that you are recommending the right kind. Learn more about the different types within the Choosing the Right Type Of 529 Plan article.

Introduction
Related Articles
  1. Stock Analysis

    The Top 5 Gold Penny Stocks for 2016

    Discover five penny stock gold miners that are well-positioned to profit in 2016, providing opportunities for investors to make significant gains.
  2. Economics

    3 Reasons Iran is Important in 2016

    Learn about how the global economy and Iran will be affected by the recently lifted trade embargo and sanctions from Iran, and what it means for 2016.
  3. Sectors

    3 Cyclical Industries To Exploit in 2016

    Learn about the three industries at the down end of their business cycles, and discover how these industries may improve in years to come.
  4. Mutual Funds & ETFs

    Top 3 Voya Funds for Retirement Diversification in 2016

    Learn about Voya Investment Management's mutual fund offerings and the three Voya funds to consider for retirement diversification in 2016.
  5. Retirement

    5 Reasons Americans Retire Abroad

    From better weather to a cheaper cost of living, here are 5 reasons to make the move.
  6. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  7. Budgeting

    Blue Apron Review: Is It Worth It?

    Read about one of the top meal-kit delivery services in the United States, and learn more about what it offers and how much it costs.
  8. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  9. Markets

    Apple's Endgame in Giving Schools Free Stuff

    Technology has the potential to rebuild the future and the fortunes of businesses. Apple Inc. seems to have realized it.
  10. Investing Basics

    4 Things That Make a Stock a Safe Bet

    No investment is a sure bet, but you can reduce your chances of taking a loss by choosing fair-priced stocks with growth potential and low volatility.
RELATED TERMS
  1. Carbon Dioxide Tax

    A tax on businesses and industries that produce carbon dioxide ...
  2. Nonrenewable Resource

    A resource of economic value that cannot be readily replaced ...
  3. Green Economics

    Green economic theories encompass a wide range of ideas all dealing ...
  4. Corporate Accountability

    The performance of a publicly traded company in non-financial ...
  5. Green Fund

    A mutual fund or other investment vehicle that will only invest ...
  6. Alternative Energy ETF

    An exchange-traded fund that invests in companies engaged in ...
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is arbitrage?

    Arbitrage is basically buying in one market and simultaneously selling in another, profiting from a temporary difference. ... Read Full Answer >>
  3. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  5. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  6. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center