A Tax-Friendly Way to Pay for School
You can use money from a Coverdell education savings account tax-free for education expenses from kindergarten through college.
Question: Are there any tax-advantaged ways to save for high school expenses?
Answer: Yes, a Coverdell education savings account lets you save up to $2,000 per beneficiary each year tax-free if the money is used for education expenses, from kindergarten through college. You can contribute the maximum to a Coverdell if your modified adjusted gross income is less than $95,000 for single filers or $190,000 on a joint tax return (you can make a partial contribution if your income is as high as $110,000 if single or $220,000 on a joint return). You have until April 18, 2017, to contribute for 2016.
For elementary and secondary school, you can withdraw money tax-free not only for tuition and fees but also for books, supplies and equipment, academic tutoring, and services for a special-needs beneficiary. You can also use the money for room and board, uniforms, transportation, and extended day programs if required or provided by the school. Coverdell money can also be used tax-free for a computer, related equipment and internet access for the student.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The beneficiary must be younger than 18 when you make the contributions and must use the money before age 30. You can contribute to a Coverdell ESA even if you’re also contributing to a 529 college-savings account. If the child doesn’t use the money, you can choose another family member as the beneficiary.
Eligible expenses for college costs are similar to those for 529s, including tuition, fees, books, supplies and equipment, as well as a computer, software and internet access used by the student. Expenses for room and board count for college students who are enrolled at least half-time – up to the amount they pay to live on campus, or up to the amount the college counts in the cost of attendance for financial aid purposes if they live off-campus (this number may be listed on the college’s Web site, or you can get it from the college’s financial aid office).
Among brokerage firms and mutual fund companies that provide Coverdells, TD Ameritrade and Charles Schwab charge no setup or maintenance fees. Both offer the same investment choices as in their IRAs, including stocks, mutual funds, exchange-traded funds and other investments available to their brokerage customers (giving you more investing options in Coverdells than in 529s). TD Ameritrade has no minimum investment requirements. You need an initial investment of $1,000 to open a Coverdell with Schwab, which is waived if you set up an automatic monthly transfer of $100 through direct deposit or Schwab MoneyLink.
Fidelity doesn’t offer Coverdells, and Vanguard and T. Rowe Price no longer offer them (although it still services accounts that were established when it did offer them).
For more information, see IRS Publication 970 Tax Benefits for Education
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
Oracle Stock Is Sinking After Earnings. Here's Why
Oracle stock is lower Tuesday after the tech giant fell short of earnings expectations for its fiscal second quarter. This is what you need to know.
By Joey Solitro Published
-
Can Tariffs Make Childcare Affordable?
Tariffs President-elect Trump suggested tariffs can address the childcare crisis, but economists are doubtful.
By Gabriella Cruz-Martínez Published
-
529 Plans: A Powerful Way to Tackle Rising Education Costs
Contributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
By Denise McClain, JD, CPA Published
-
Are Student Loans Being Forgiven or Not?
Student Loans The House and Senate voted to repeal President Biden’s student loan forgiveness plan, but does it even matter?
By Katelyn Washington Last updated
-
Are Scholarships Tax-Free?
Education Scholarships are generally tax-free if certain IRS and other requirements are met.
By Kelley R. Taylor Published
-
Student Loan Forgiveness Blocked For Now Due to Court Rulings
Biden's student loan debt forgiveness program is on hold until the U.S. Supreme Court weighs in.
By Kelley R. Taylor Published
-
529 Plan Contribution Deadlines
529 Plans Many states have year-end deadlines for making 529 college savings plan contributions.
By Kelley R. Taylor Last updated
-
3 Key Ways You Can Help a Child or Grandchild Pay for College
college Options such as 529 plans, education savings accounts and tax-free gifts can ensure you don’t carry a child’s student loan debt into your golden years.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Borrowers Over 50 With Student Loan Debt
Paying for College Millions of borrowers 50 and older are struggling to repay loans for themselves and their children, some delaying retirement. There’s a trick, though, to help with repayment.
By Elaine Silvestrini Published
-
How to Spend $1,000: Find Cheap (or Free) Online Courses to Build Career Skills
Smart Buying There's a huge array of skill-building online courses that can level up your career for under $1,000.
By Kim Clark Published