College Education Savings

Planning to save for your child's education? There are several ways you can achieve this goal. The most common methods are the Qualified Tuition Program and Coverdell Education Savings Account.

Qualified Tuition Program (QTP): Also known as a 529 plan, this program is established and maintained by a state or agency and allows you to either prepay or contribute to an account dedicated to paying for a student's higher education expenses at an eligible educational institution. Eligible educational institutions include any college, university, vocational school, or other postsecondary educational institution that participates in a student aid program administered by the Department of Education.

When contributing to a QTP, the contributions cannot exceed the amount necessary to provide for the qualified higher education expenses of the designated beneficiary (the student or future student).These contributions are not deductible on your federal income tax return. However, any distributions from a QTP are tax-free, unless the distribution exceeds the qualified higher education expenses.

Qualified education expenses include expenses related to enrollment or attendance at an eligible educational institution. To be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.

The following is a list of qualified education expenses:

• Tuition and fees.
• Books, supplies, and equipment.
• The purchase of computer technology, equipment, or Internet access and related services if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software for sports, games, or hobbies, unless the software is predominantly educational in nature.)
• Special needs services needed by a special needs beneficiary.
• Room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts:
  • The allowance for room and board, as determined by the eligible educational institution, that is included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student; or
  • The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Coverdell Education Savings Account (ESA): If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. For most taxpayers, MAGI is the adjusted gross income as figured on your federal income tax return. There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year cannot exceed $2,000, no matter how many accounts have been established. This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax-free until distributed. Distributions are tax-free to the beneficiary, unless the distribution exceeds the qualified education expenses. The excess will be taxable to the beneficiary and usually subject to an additional 10% tax.

The above education savings methods are not an either/or option. Therefore, you can contribute to both a QTP and a Coverdell ESA in the same year, for the same designated beneficiary if you so choose. Additionally, if a QTP and/or a Coverdell ESA are used to finance a student's education, the student or the student's parents still may be eligible to claim various tax credits such as the American Opportunity Credit, Hope Credit, or the Lifetime Learning Credit.