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1 1 (June 20, 2019)

handle is hein.crs/govbaei0001 and id is 1 raw text is: Cogesoa Resarc Servic Updated June 20, 2019 Major Features of 529 Plans and Coverdells There are two types of tax-advantaged education savings accounts. The first are qualified tuition programs (QTPs), commonly called 529 plans (referring to the section of the tax code that dictates their tax treatment). The second are Coverdell education savings accounts (ESAs), often referred to simply as Coverdells. This In Focus compares the major features of these two types of accounts; see Table 1. 529 Plans With 529 plans, distributions (i.e., withdrawals) are tax-free (including any investment earnings) if they are used to pay for qualified higher education expenses. In addition, up to $10,000 may be withdrawn tax-free per beneficiary per year and used for qualifying elementary and secondary school tuition expenses. If some or all of the distribution is used to pay for nonqualified expenses, then the earnings portion of the distribution is taxable, and may be subject to a 10% tax penalty. Most 529 plans are 529 savings plans, in which a contributor invests in a portfolio of mutual funds or other underlying investments. The savings and accumulated investment earnings can be used to pay for qualified education expenses at a later point in time. Another less common type of 529 plan is a prepaid tuition plan. In a prepaid plan, a contributor makes payments at current prices that entitle the beneficiary to future academic periods, course units, or a percentage of tuition costs. Coverdells A Coverdell is a tax-advantaged investment account that can be used to pay for both higher-education expenses and elementary and secondary school expenses (elementary and secondary school expenses are not limited to tuition expenses, as in the case of 529 plans). The tax advantages of Coverdells are very similar to those of 529 plans. Unlike 529 plans, annual contributions are limited to $2,000 per beneficiary across all Coverdell ESAs, and the ability to make contributions is phased out for higher-income taxpayers. In contrast, 529 plans are typically capped only by significantly higher lifetime contribution limits. There are also benefits to 529 plans and Coverdells outside of the tax code. These plans are treated more favorably than other types of college savings or investments when determining a student's eligibility for federal need-based student aid. More information can be found in CRS Report R42807, Tax-Preferred College Savings Plans: An Introduction to 529 Plans, by Margot L. Crandall-Hollick, and CRS Report R42809, Tax-Preferred College Savings Plans: An Introduction to Coverdells, by Margot L. Crandall-Hollick. Table I. Major Features of 529 Plans and Coverdells 529 Plans Coverdells Federal Income Tax Treatment Contributions Not deductible from federal income tax. Not deductible from federal income tax. Withdrawals Excluded from gross income (exempt from income tax) if Excluded from gross income (exempt from income tax) if distributed for qualified expenses; investment earnings are distributed for qualified expenses; investment earnings are subject to income tax and possibly a 10% penalty if not subject to income tax and possibly a 10% penalty if not used used for qualified expenses. for qualified expenses. Contribution Limit No fixed contribution limit. Lifetime account balance limit Annual limit of $2,000 per beneficiary, subject to phase-out if set by state; ranged from $235,000 to $529,000 in 2018. contributor's income is between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers). Contributions in excess of $2,000 are subject to a 6% excise tax. https://crsreports.congress go

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