529 Plan
Named for the section that describes them in the Internal Revenue Code, these plans are a type of municipal fund security. Such arrangements enable families to save for education on a tax advantaged basis and to a significantly greater degree than a Coverdell account or UTMA/UGMA account. Most of the time, investors in one state may invest in another state's 529 plan which does not affect the school that one chooses to apply for and matriculate at. Almost every state has a 529 plan. Major plan benefits include, to wit:

  • Contribution amounts are substantial (up to $300,000 per beneficiary) and neither income limitations nor age restrictions exist.
  • Investment grows on a tax-deferred basis.
  • Withdrawals to pay for college costs are tax-free
  • Donor may change beneficiary.
  • Some states may offer tax benefits as well.
  • The donor retains control of the funds. Earnings on non-qualified withdrawals are subject to ordinary income tax and a 10% withdrawal penalty.
  • Simplicity. Enrollment in and contributions to the plan are easy to accomplish. Either the state treasurer's office or an outside investment management company (mutual fund) manage the plan's assets.
  • Tax Reporting: Form 1099 to report (non) taxable earnings is mailed only in the year that the withdrawals are made.
  • Flexibility in allocating assets are rolling over from one plan to another is afforded the investor. Each plan's rules differ, however, and should be consulted.

Coverdell Education Savings Accounts
While other education savings accounts (such as state-sponsored 529 plans) are not covered on the Series 65 exam, the Coverdell ESA is tested. Formerly known as the Education IRA, it had been included with other IRAs in the testing process. Therefore, basic questions about the Coverdell are likely to be found on the exam. Make sure you know the following information:

Annual contribution limit is $2,000; up from the $500 limit for the old Education IRA

  • This limit is per student, so it is not possible for two sets of grandparents to each contribute $2,000 to two different Coverdell ESAs for the same student
  • No tax deduction is available for the contribution, but earnings grow tax deferred
  • Withdrawals of earnings are tax free, if used for qualified education expenses
  • Withdrawals of earnings not used for qualified education expenses are taxed at the student's ordinary income tax rate and will also be subject to a 10% penalty


Introduction

Related Articles
  1. Financial Advisor

    Why Coverdell ESAs May Trump 529 Plans

    Coverdell ESAs still trail 529 plans in popularity by a wide margin due to their low contribution limits. But these accounts can be a viable alternative.
  2. Retirement

    4 Smart 529 Plan Alternatives to Consider

    Learn about some alternatives to the popular college-saving 529 plan that may also make sense, such as prepaid tuition plans and Coverdell accounts.
  3. Personal Finance

    Saving for College: 7 Options to Consider

    There are many options choose from when you're looking for the right educational savings plan for your child.
  4. Personal Finance

    529 Plans: Your Most Pressing Questions Answered

    When parents start preparing for college costs, here are the most commonly asked questions about 529 plans.
  5. Financial Advisor

    Advising FAs: Explaining College Savings Accounts to Clients

    There are several types of savings accounts designed for higher education available today. The right one for you will depend upon factors such as your tax bracket, time horizon, investment objectives ...
  6. Personal Finance

    529 Plan or Coverdell? How to Choose College Savings Plans

    There are two options when it comes to tax-free college savings plans: a 529 plan or a Coverdell ESA. Here's how they compare.
  7. Personal Finance

    529 Plan Contribution Limits in 2016

    Learn about the contribution and account balance limits on 529 plan accounts and discover how these contribution limits differ in each state.
  8. Personal Finance

    Stop Procrastinating! Enroll In A College Savings Plan

    The cost of sending your kids to college could be a serious financial burden - unless you get prepared. Now.
  9. Financial Advisor

    Using 529 Plans to Save for College

    Paying for college is no easy feat. Here is a lowdown on 529 plans, the educational savings plans that help families set aside funds for college costs.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center