Saving For Your Child’s College Education
Section 529 college savings plans are named after the section of IRS code that created them. They are college- or state-sponsored, tax-advantaged plans that allow individuals to invest in portfolios of stocks, bonds, and cash equivalents. Contribution limits for 529 plans vary from state to state. Distributions made to pay qualified education expenses are tax free. Prepaid tuition plans also fall under Section 529, but for the purposes of this article, the phrase 529 plan refers only to a college savings plan.
Coverdell Education Savings Accounts (formerly known as Education IRAs) allow tax-free earnings on nondeductible contributions of up to $2,000 per year, per student. Coverdell Education Savings Accounts can generally hold a variety of investments. They can only be established for a child younger than 18, and the money must be distributed for educational costs before the beneficiary turns 30. Income limits apply: Single filers with modified adjusted gross incomes (MAGI) of more than $110,000 and joint filers with MAGI in excess of $220,000 are not eligible. Qualified withdrawals may be used to fund a primary, secondary, or college education.
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