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Tax Reform Adds Education Benefit

Tax law provides two tax-advantaged savings plans for the Qualified State Tuition Plan (commonly referred to as a 529 Plan). They are similar in that contributions to the plans are not tax deductible (although some states do allow a deduction for contributions to their plans) and the earnings are tax deferred and tax free if used for qualified education expenses.

Education planning Curran Albany NY 529 plan Coverdell


They are different in that only $2,000 per year can be deposited into a Coverdell account, whereas contributions to a 529 plan are only limited by gift tax considerations and the cost of attending the state’s highest-cost university. This generally means the annual contribution to a 529 plan is limited to the annual gift tax exclusion amount ($15,000 for 2018) in order to avoid gift tax complications. However, the annual gift limit is per contributor and multiple individuals, typically grandparents, can also contribute to a 529 plan. On the other hand, a maximum of only $2,000 can be contributed to a Coverdell account regardless of the number of contributors. Thus, 529 plans typically accept the largest amount of college savings funds.

Another difference has been that Coverdell accounts can be used for education in kindergarten and above, while 529 plans can only be used for post-secondary education. As a practical matter, the $2,000 annual Coverdell contribution limits don’t provide for a substantial amount of savings that can be used for early childhood education.

To alleviate that disparity, the Act amended the 529 plan rules to allow, beginning in 2018, up to $10,000 of 529 plan funds to be used federally tax-free annually, per student, for elementary school and high school education expenses. In addition the funds can be used to cover the expenses of attending public, private and religious schools. However, some states have not yet adopted the Act’s law change or may need to change the language in their tax codes that define the accounts as “college” savings plans before distributions for elementary and secondary school expenses will qualify as totally state tax free. States that have allowed a deduction for contributions to their plans may decide to scale back some of the tax benefit if distributions are used for expenses in grade K-12.

Both a Coverdell and a 529 plan can be established for the same student, and the combination allows more funds to be accumulated.

Interested in finding out how much you should be saving for your student's education? Use our Education Calculator!

Please check with your tax advisor, your Curran Wealth relationship manager,
or contact Curran Wealth Management if you have any questions.
518.391.4200
info@curranllc.com


The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness. No one connected with CIM, LLC or CIMAS, LLC can ensure tax consequences of any transaction.