Two Educational Accounts With Tax Advantages

July 22, 2011 by  Filed under: Taxes 

The cost of our children’s education is always at the back of mind of every parent or guardian. These costs are always on the rise and if you want your child to have the best education possible, you may need to save up quite a significant amount of money. However, thanks to some favorable tax opportunities, the IRS can help you with your child’s education savings. You can take advantage of various tax reliefs that are targeted towards assisting people who save for their children’s education. There are two main education funds that come with tax benefits:

1. Educational 529 Plans

The Educational 529 plans are established in the Internal Revenue Code section 529 and thus, the explains name. The 529 plan accounts are opened and run by a parent or guardian and are usually state administered. All states have at least one 529 plan fund. Furthermore, there are some states that run more than one fund. There are also colleges that run their own 529 plan accounts. You can choose to have your 529 account in your local state or from a different state. However, to encourage people to put their savings in accounts within the state of residence, most states will have a tax savings for people who save for the children’s education locally.

The funds in the 529 plans are managed by fund managers, just like in any other investment product. The contributions to the fund are an after-tax payment and therefore, the person contributing does not get any advantages for making contributions. Anyone can put funds into these 529 plans. However, the growth of the fund is tax free and there are no taxes charged for any capital gains or interests made. Besides this advantage, any distribution of the funds to a qualifying educational institution is also tax free.

One of the major advantages of the Educational 529 plan is that the account is run in the name of the parent or guardian. This means that it does not reduce the chances of your child getting educational scholarships due to the funds in the account. You can even have the account under the name of the grandparents, so as to reduce any linkage between the account and your child (and therefore not jeopardizing any opportunity for financial aid).

2. Coverdell Education Savings Account

The Educational savings accounts were expanded and remodeled in 2002 and were renamed “Coverdell” in honor of the late Sen. Paul Coverdell of Georgia. The accounts are at times, referred to as Educational IRAs because they operate like retirement IRAs. Contributions are taxed, but withdrawals to qualifying educational institutions are tax free. The contributions are limited to a cap of $2,000.00 and the cap is lowered for taxpayers with an Adjusted Gross income of $95,000.00 and $110,000.00 or for those who file jointly; between $190,000.00 and $220,000.00. Beyond $110,000.00 for singles and $220,000.00 for joint returns, the taxpayers are not eligible for the Coverdell Education Savings Account. An advantage of the Coverdell Education Savings Account is that unlike the 529 plans that cater for higher education, the Coverdell account can finance education from kindergarten all the way through higher education.

Rob L Daniel and partners of Limon Whitaker & Morgan, for years have helped businesses and individuals Nationwide, with their delinquent IRS & State tax problems. The firm is based in Los Angeles, California USA. http://www.limonwhitaker.com / Tel:888.321.6188

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