Coverdell and 529 Plans


Several clients have recently asked me about college saving plans. Here’s a bird’s eye view of two options: Coverdell and 529 Plans.

What are the similarities?

  • Contributions have no federal tax benefit in the year when made.
  • Earnings grow tax free.
  • Earnings—at time of distribution—remain tax free when distributions are used for qualified education expenses.
  • Distributions (or a portion of them) that are not used for qualified education expenses are subject to regular income tax rates, plus a 10% additional tax (penalty).
  • Plan definitions for qualified higher education expenses have similar meanings.
  • Qualified education expenses are reduced by other tax-free education assistance (including the American Opportunity Credit).

 What makes the Coverdell unique?

  1. Contributions:
    • Are limited to $2,000 per year per beneficiary who is 18 or younger. Limitation applies to all contribution sources. See IRS Publication 970 for details;
    • Are not allowed if modified adjusted gross income (MAGI) is $110,000 (or $220,000 if married filing jointly); and
    • Are reduced if MAGI is between $95,000 and $110,000 (or $190,000 and $220,000 if married filing jointly). 
  2. States do not allow a tax deduction for contributions
  3. Distributions can be used for elementary, secondary, or postsecondary qualified education.
  4. Investment advisors, banks, brokerage firms, and other companies often offer Coverdell savings accounts and can help you establish them.

What makes the 529 Plans (or Qualified Tuition Programs) unique?

  1. Contributions are not limited for federal purposes.
  2. States often do allow a tax deduction for limited contributions. Check your state’s requirements.
  3. Distributions can be used for elementary, secondary, or postsecondary qualified education. But there is a $10,000 maximum limit if used for elementary or secondary expenses. Note, distributions for elementary and secondary education is new to the 529 Plans as of 2018.
  4. A state offers and operates the 529 plan. You must work with the State to establish the plan. You do not necessarily need to be a resident of that State to establish, although a state income tax deduction may then not apply to you. Here is Wisconsin’s plan:

Things to think about…

  • If you want monies to be available for other life-events, you may want to consider other types of saving plans or investments for the beneficiary.
  • Don’t forget federal tax gift limitations and requirements. For 2018, the annual gift exclusion is $15,000.
  • Speak with your tax professional and/or investment advisor to aid you in determining if an education savings plan is right for you and your beneficiary.

Need more info?

Not Everything Has Changed


I thought it would be helpful to provide a list of items that have not changed with the recent Tax Cuts and Jobs Act of 2017. This list is not exhaustive, but it does include the most common for clients I have served. There was discussion about changes to these items, but nothing changed.

  • Selling your personal residence? You’re still able to exclude a gain of $250,000 (or $500,000 if married) when you sell your home and if you lived in the home two out of the last five years.
  • Age 65 before the close of the tax year? You’ll still qualify for the additional standard deduction.
  • Adopting a child? You can still exclude from income amounts paid by your employer under a qualified adoption assistance program.
  • Paying out-of-pocket qualified educator expenses as a teacher? You may still track and deduct $250 of expenses above-the-line on your tax return.
  • Attending college? The credit options remain the same for qualified higher education expenses. You may take either the Lifetime Learning Credit or the American Opportunity Credit.
  • Paying student loan interest? You’ll still be able to deduct up to $2,500 of interest paid under a qualified student loan.

If you’re in doubt about a tax provision, please remember to research using reliable resources and/or ask your tax preparer to help you understand how the issue applies to you.