What is the difference between an Education IRA and a 529 plan?
Answers | 3
Great question. They are both very popular plans.
The Education IRA is now called a A Coverdell Education Savings Account (ESA).
On 529 plans or college tuition plans, there are 2 types: A regular 529 and a prepaid 529 plan.
Some key differences:
1. The ESA has a contribution limit of $2,000/year for the beneficiary
2. The ESA has income restrictions for contributions
3. The ESA contributions must be used by age 30
Here is a chart with the 2016 rules:
Here is a link to IRS publication 970:
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It's not what you make; It's what you keep that determines your lifestyle.
An "Education IRA" is now referred to as the Coverdell ESA.
Like a 529 college savings account, a Coverdell is a savings account with special tax status to encourage and reward saving for qualified education expenses.
Deposits to both a Coverdell and a 529 account grow tax-free until distributed and withdrawals are tax-free when used for qualified educational expenses.
Very different are the requirements for contributing to and withdrawing funds:
- K-12 and college qualified expenses
- $2,000 limit on total annual contributions
- Beneficiary must be younger than 18 when contributions are made
- Contributions are not tax deductible
- Funds must be withdraw by age 30
- Modified adjusted gross income must be less than $110,000 ($220,000 joint) to contribute
- College qualified expenses only
- No annual contribution limit
- No age restriction on beneficiary
- Contributions may be state-tax deductible
- No time or age limit on withdrawals
- No income limit to establish account
If you qualify you may set up both a Coverdell and a 529 for the student.
ALERT: Withdrawals are only tax-free if they are used to pay qualified education expenses. The earnings portion of all non-qualified withdrawals will be subject to income tax plus a 10 percent penalty tax.
To find out if you are eligible for educational tax credits, and to learn how to manage college savings plans for financial aid eligibility, gift and estate taxes and state tax deduction visit Women Investing Now (WIN).
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