529 plans are education savings plans designed to help set aside funds for eligible education expenses. Traditionally, 529 plans have only been available to be used for higher education expenses. However, with the new tax law comes expanded benefits to 529 plans. Owners are now able to withdraw up to $10,000 per year tax-free on private elementary and secondary school expenses, including tuition and books.
While the change is a great added benefit for families that have kids in private school, it will require more savings and a longer time horizon for college savings. 529 plan withdrawals are tax-free as long as they are spent towards qualified education. The earlier you start saving for your children’s education, the longer you will benefit from tax-free compounding.
Coverdell Education Savings Accounts are still another option to save for private K-12 schooling that are less popular, based on the income restrictions and limited amount you can save each year. The chart below summarizes the difference.
529 Plan vs Coverdell Education Savings Account
|529 Plan||Coverdell Education Savings Account|
|Contribution Limit||The annual gift tax exclusion for each beneficiary which is $15k for 2018||$2k per beneficiary|
|Income Limit||None||Adjusted gross income of $110k for individuals and $220k for married couples.|
|Tax Benefits||Not tax deductible at federal level, but is deductible for some states. Earnings & withdrawals are tax-free if used for qualified expenses.||Not tax deductible at state or federal level. Earnings & withdrawals are tax-free if used for qualified expenses.|
|Expenses It Can Be Used Towards||All post-secondary qualified education expenses, including tuition, room & board, mandatory fees, books, & computers. As of 2018, $10k/year may be used for private K-12 qualified education expenses as well.||All qualified education expenses, including tuition, room & board, mandatory fees, books, & computers for primary, secondary, and post-secondary education.|
If you think that private education is going to be a factor in your child’s education, we can run education projections to see if you’re on track for college and help customize an investment strategy to meet your goals.
Still confused about 529 Plans? Read my blog 529 FAQ.
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Tags: Education Planning