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A qualified education savings account usually offers federal tax advantages to participants. The key factors are “how much” and “how they work” for investors. While you can use any savings or investment account to plan for college, qualified college investment funds offer tax advantages that standard accounts do not.
For example, a Coverdell Education Savings Account (ESA) offers tax-free earnings increases, if the parent qualifies. If the parent (or child) has “modified adjusted gross income” less than $110,000 (or $220,000 for joint tax returns), and your child is under 18, you qualify for these college savings accounts. If you only withdraw funds for your child’s education expenses each year, these withdrawals are also tax-free.
The same features apply to 529 Plans, which also allow you to contribute more than the $2,000 annual maximum with ESAs. These college savings plans are state-operated and tax treatments may differ slightly from state-to-state. Along with excellent federal tax benefits, you may also enjoy some state tax breaks. Everyone is eligible (no gross income restrictions) and, in some states, you could deposit up to $300,000 per child. Check your state 529 educational savings plans and regulations to learn their “fit” for your college planning goals.
Whether you reside in a high or low income tax bracket, the tax benefits of qualified college investment funds are beneficial for you. As college costs increase at four to six percent per year, these federal and state tax breaks become ever more valuable.
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