As a parent with young children, you are faced with many rewards and challenges. One of which may be saving for the cost of a college education. The good news, there are two tax-favored options that might be beneficial: a qualified tuition program and a Coverdell education savings account.

Qualified Tuition Program

A qualified tuition program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan allows taxpayers to contribute to an account for paying a student’s qualified higher education expenses. Similarly, private plans do the same but are provided by colleges instead of a state. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified education expenses for a designated beneficiary. As much as $10,000 of distributions may be used for enrollment at a public, private, or religious elementary or secondary school. For any distribution made after 2018, qualified education expenses of 529 plan include certain expenses associated with registered apprenticeship programs and qualified student loans.

Under the SECURE Act 2.0 of 2022, beginning in 2024 the amounts held in a 529 plan of a designated beneficiary at least 15 years may be rolled over to a Roth IRA of the same beneficiary and excluded from gross income. The distribution cannot exceed the aggregate amount contributed to the 529 account (including earnings) made in the previous five years. Also, there is an aggregate lifetime limit of $35,000 on such rollover distributions with respect to the designated beneficiary.

Coverdell Education Savings

Coverdell education savings are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expense. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.

Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals.

Contributions are not deductible by the donor and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period.

If you would like to explore how these opportunities can work for you and have us fully evaluate your situation, please do not hesitate to call us at (402) 932-8815.

Sincerely,

W. E. Stevens PC