Saving for College via Section 529 Plans and Coverdell Accounts

Postsecondary education isn’t free. The costs of attending college are huge. 529 Savings Plans and Coverdell Accounts provide built-in tax incentives to help you save for college expenses.

Section 529 of the Internal Revenue Code is long, complex, and not for the faint of heart. Still, savings accounts that fall under its regulations can be a fantastic way to save for future educational expenses. To make it work, though, you have to understand its requirements; the IRS doesn’t have a category of “close, but no cigar.” Your account will either qualify under the regulations for tax deferrals or exemptions, or it won’t. And if it doesn’t, the consequences may be costly.

  • Section 529 Plans: One of the newest types of incentive savings plan is the Qualified Tuition Program, or Section 529 plan, which is designed solely for the purpose of saving for college or any other type of qualified postsecondary education, either tax exempt or tax deferred, depending on a number of factors. Like almost everything else the government cooks up, though, Section 529 plans aren’t as simple to navigate as everyone selling these plans would have you think.

  • Coverdell Accounts: If the world of tax deferred/tax-exempt savings accounts were an ice cream parlor, Coverdell Education Savings Accounts (ESAs) would be a new and improved flavor — not everyone’s favorite, but just what you may want on a particular day. M

    Many people, when shopping for a place and a way to save money for college, prefer Coverdell accounts, whether for their wider range of investment options, the account owner’s increased level of control over the account, or the fact that certain expenses qualify for tax exemption under Coverdell rules that aren’t under Section 529 requirements. Whatever your reasons, Coverdell ESAs may be just the flavor of account you want today.

Code Section 530, covering Coverdell ESAs, follows hot on the heels of Code Section 529 (those government sorts are sticklers for going in order). In it you find all the rules, regulations, and other assorted gobbledygook that govern these sorts of accounts.

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