Welcome to the Weekly SUMmary - 06/18/2021
What are 529s? What are Coverdells?
Both of these are education investment/savings accounts.
Let’s first look at the definition of 529 Plans, according to the Securities and Exchange Commission (SEC):
“A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.”1
Things to know/note:
- Since the passing of the Tax Cuts Jobs Act (TCJA) of 2017, 529 education savings plans can also be used for qualifying K-12 expenses such as tuition.
- Contributions in many plans are deductible from state income tax.
- Contributions follow gifting limits ($15,000 per person per year in 2021) but allow for an exception that equates to 5 years worth of gifts in one contribution2 .
- Investments are typically limited based on the plan utilized.
Coverdell ESA Plans
The Internal Revenue Service (IRS) defines Coverdell ESA Plans as:
“A Coverdell education savings account (Coverdell ESA) is a trust or custodial account set up in the United States solely for paying qualified education expenses for the designated beneficiary of the account. This benefit applies not only to qualified higher education expenses, but also to qualified elementary and secondary education expenses.”3
Things to know/note:
- Contributions are not deductible.
- Contributions are capped at $2,000 per year, per recipient/beneficiary.
- Investments are wide ranging.
What should I do?
First and foremost, if you believe your child will attend college, I would recommend saving in some form. Which choice you make depends on your ability to fund and desire for tax deductible contributions. The TCJA dramatically altered the ability to take qualified distributions from 529 plans. With contribution limits much higher and the potential for deductible contributions, one may be swayed to believe that the 529 is most attractive. Bear in mind, Coverdells offer a wider range of investment options, typically.
I am hosting a webinar regarding education funding 6/23/2021 @ 5PM MST that will address many questions one may have regarding the topic addressed in this blog. See this link to register to attend: https://www.sumfsg.com/events/june-2021-webinar-how-to-pay-for-college-student-aid-demystified
In addition to the information provided here, I have posted about education funding previously. Find a link to this content here: https://www.sumfsg.com/blog/college-planning-what-are-my-options
In order to understand potential costs, the following link may be helpful: https://www.sumfsg.com/resource-center/investment/estimating-the-cost-of-college
I cannot emphasize enough how much information there is on this topic on the internet. The referenced links should be immensely helpful in understanding the nuances of each product.
With so much information to review, it is strongly recommended that you speak to a professional regarding your situation.
If I don’t see you in our upcoming webinar, best wishes in this adventure and…
Do SUMthing smart with your money.
- if utilized, the gifter will need to ensure they do not make additional gifts to the giftee for the remainder of the 5 years otherwise they may pay gift tax
The content provided is meant to be educational in nature only and not to be construed as investment advice. Investments referenced are for example only and should be considered strongly prior to selecting for your portfolio. Investors should research or seek professional advice prior to buying and selling securities.
Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer's official statement, which can be obtained from your financial professional. Be sure to read carefully before investing.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.