Saving for Education

The Basics:

  • A Coverdell Education Savings Account (ESA) provides a tax-efficient way to save for a student’s education in elementary, secondary and post-secondary educational institutions.
  • A Qualified Tuition Program (QTP) provides a tax-efficient way to save for higher education expenses by either prepaying or contributing to an account established for paying a student’s qualified higher education expenses.

Coverdell ESA

The total contributions for the designated beneficiary (someone 18 or younger or who has special needs) of this account can’t be more than $2,000 in any year, no matter how many accounts have been established.

Contributions aren’t deductible, but distributions are tax-free as long as they don’t exceed the amount of qualified education expenses for the year, such as tuition, books and fees. The amount of qualified education expenses must be reduced by nontaxable education benefits received, such as tax-free employer-provided educational assistance, tax-free scholarships and veterans educational assistance. Taxable distributions generally are subject to a 10% penalty.

The $2,000 limit is reduced if the contributor’s modified adjusted gross income (MAGI) is more than $95,000 ($190,000 if Married Filing Jointly). No contribution can be made if the contributor’s MAGI is $110,000 or more ($220,000 or more if Married Filing Jointly). Excess contributions are subject to a 6% penalty.

You can make a contribution to a Coverdell ESA until the due date of the return (not including extensions) for the year for which you are making the contribution.

Eligible educational institutions include education in any public, private or religious school that provides elementary or secondary education, and any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education.

The Hope, American Opportunity and Lifetime Learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren’t used for both benefits.

You can make contributions to a Coverdell ESA and a QTP in the same year for the same beneficiary. You can also change the designated beneficiary of a Coverdell ESA to another member of your family.

If there’s a balance in the Coverdell ESA at the time the beneficiary reaches age 30, it must be distributed within 30 days, unless you change the designated beneficiary of the ESA to another family member who is younger than 18 or who has special needs.

Establishing a Qualifying Tuition Program

With a Qualifying Tuition Program (QTP), you’re either prepaying or contributing to an account established for paying a student’s qualified higher education expenses. QTPs can be established and maintained by a state or an agency or instrumentality of the state. QTPs can also be established and maintained by one or more eligible educational institutions only for prepaying qualified higher education expenses.

Your state government or educational institution in which you are interested can tell you whether or not they participate in a QTP. You can’t contribute more than the amount needed to provide for the higher education expenses of the beneficiary. Contributions made to a QTP aren’t deductible on your federal tax return.

You can change the designated beneficiary of a QTP to another member of your family. Distributions from a QTP aren’t taxable to the extent the amounts distributed don’t exceed the amount of qualified higher education expenses for the year.

Eligible expenses include tuition, fees or books, or for other required supplies and equipment. For 2009 and 2010, qualified higher education expenses include costs for computer equipment and technology, and for internet access and related services if the equipment, technology, or services are 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. If the beneficiary is at least a half-time student, certain room and board expenses also are qualifying expenses.

The amount of qualified education expenses must be reduced by nontaxable education benefits received, such as tax-free employer provided educational assistance, tax-free scholarships and veterans educational assistance.

Taxable distributions generally are subject to a 10% penalty.

The Hope, American Opportunity and Lifetime Learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP as long as the same expenses aren’t used for both benefits.

You can make contributions to a Coverdell ESA and a QTP in the same year for the same beneficiary.