Most parents have heard of a 529 College Savings Plan, which is an investment account that lets you save for future college costs while reducing your tax liability, but very few know there’s a similar way to save for K-12 private schooling. It’s called a Coverdell Education Savings Account (ESA).
A Coverdell ESA is a lot like a 529 plan, meaning earnings and capital gains grow without being subject to federal taxes so long as they are used for eligible education expenses. While both were originally designed to alleviate the cost of college, the major difference between the two is that the Coverdell ESA includes elementary and secondary school tuition as an eligible expense in addition to universities and vocational schools.
If you’re wondering why 529 plans are more popular and well known, it’s because 529 plans do not have contribution limits, and in some situations, 529 plans are also exempt from state taxes. It’s worth looking into a 529 plan state tax calculator to determine the tax liability in your state. Regardless, Coverdell ESAs are increasing in popularity as more students use them for prep school. Other benefits of a Coverdell ESA over a 529 plan include more investment freedom and, in some cases, the potential for less investment fees. Beneficiaries are allowed to have both a Coverdell ESA and a 529 plan, so parents who are saving for both private school and college should first max out contributions into a Coverdell ESA, and then place any additional contributions into a 529 plan.
By Adam Lucas Adam Lucas holds a Finance degree and an MBA from the University of Kentucky. His work has appeared in many major outlets including Yahoo, AARP.org, and GoBankingRates.com.
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