Student, Education College and K-12 Savings Accounts
529 college savings contributions are not tax deductible via the IRS or federal tax return, but they grow tax-free and your distributions are not taxed when spent on qualified expenses. Some states may consider 529 contributions tax deductible. Thus, check with your 529 plan or your state to find out if you’re eligible. You may also consider a Coverdell ESA which offers similar benefits but has tighter restrictions.
Key points:
- Tax Benefits: Contributions to 529 plans are not federally tax deductible, but the funds grow tax-free and withdrawals for qualified educational expenses are also tax-free. Some states may offer tax deductions for contributions—check with your state for eligibility.
- Qualified Expenses: Funds from 529 plans can be used for a wide range of educational expenses, including tuition, fees, books, and room and board. They can also be used for K-12 tuition up to $10,000 per year per beneficiary and funds can be rolled over tax-free to ABLE accounts for beneficiaries with disabilities.
- Non-Qualified Expenses: If you use funds from a 529 plan for non-qualified expenses, you may need to report this on your taxes. However, withdrawals for qualifying expenses generally require no additional reporting. You will get a 1099-Q reporting these details which you can add to your tax return when you eFileIT.
- Coverdell ESAs: These accounts are another option for education savings, allowing tax-free growth and withdrawals for qualified expenses like tuition and books. They have contribution limits and income eligibility restrictions, and funds must be used or transferred by the beneficiary's 30th birthday. See ESA details.
These accounts provide tax advantages and flexibility for saving and paying for educational expenses from K-12 through college, but it's essential to understand the specific rules and benefits associated with each type of account.
Instructions: If you took a distribution from your 529 plan or other college savings plan and did not use the funds for educational expenses, see how to report your 1099-Q and pay taxes on this. In most cases, you do not need to do anything with 1099-Q if you used the money on qualifying expenses.
A 529 plan allows you to save for college or higher education while receiving a tax benefit. Earnings from 529 plans are not subject to federal tax and generally not subject to state tax when used for qualified education expenses such as tuition, fees, books, as well as room and board. The contributions made to the 529 plan, however, are not deductible.
There are a few tax-advantaged savings plans to encourage saving (and give tax benefits) for you or your dependent's future education costs:
- Tax-free Refunds for Tuition/Other Qualified Education Expenses: If a 529 plan beneficiary receives a refund from an eligible educational institution for tuition or other qualified expenses, the distribution will be tax-free if it is re-contributed to a 529 plan within 60 days. The re-contributed refunds must be contributed to a 529 plan for the same beneficiary, but they do not have to be made to the same 529 plans from which they were distributed. These re-contributions do not count against a plan's contribution limit.
- K-12 Education Tuition: This allows an alternative option to use 529 plan distributions for up to $10,000 for elementary or secondary school (Kindergarten through 12th grade) tuition at a public, private, or religious school. The distributions cannot be used for home schooling, computer, or summer camp expenses.
- Rollover Funds to ABLE (Achieving a Better Life Experience) Accounts: This allows funds from a beneficiary's 529 plan to be rolled over within 60 days, tax-free to an ABLE account for the same beneficiary or other qualified family member. The accounts are for persons who have been diagnosed with a significant disability before age 26 with a condition that will last at least 12 consecutive months. This allows them and their families to save and pay for disability-related expenses. The person must also be receiving Social Security Disability Benefits or obtain a disability certificate from their doctor. The rollovers and any contributions made to the ABLE account should not exceed the annual ABLE contribution limit.
Contact an eFile.com Taxpert if you have any questions about these education tax savings accounts. If you want to learn more about tax-free education savings accounts, read on.
Types of Education Savings Plans for K-12 and College Students
Two education savings accounts are available to K-12 and college students (as well as those paying for someone's education). These types of accounts allow you to save money for school expenses and withdraw funds tax-free:
You may have heard that a 529 Plan is a bad idea or there are risks associated with the 529 Plan. This is because there are strict rules in place to assure the funds are used only for qualified educational expenses. If you set up a Qualified Tuition Program, be sure you are only going to be spending this money on qualified expenses. 529 accounts are generally a great investment as the earnings grow tax free. There are different organizations which offer these plans; find a plan which is best for you. Read below for information on both types of education savings plans.
Which Education Savings Plan Is Right for Me?
Compare your options below if you want to save for school - each plan has pros and cons based on your situation.
Annual contribution limit of $2,000 applies.
Annual contribution limit is equal to the gift tax limit - see a breakdown by year below.
To open and use an ESA, you must earn less than $110,000 if you are single or $220,000 for couples
No income level restrictions.
The account must be open when the beneficiary is under age 18 and contributions can only be made until they are 18; between age 18 and 30, all funds must by withdrawn.
There is no age restriction on the age of the beneficiary.
Owners of the account can make investments that grow tax-free - there are generally more options for an ESA.
Owners of the account can make investments that grow tax-free - there are generally more strict options for a 529 Plan.
College tuition and expenses are covered; elementary and secondary tuition and expenses are covered.
College tuition and expenses are covered; elementary and secondary tuitions are covered, but expenses are not.
Contributions grow tax free and you will not owe taxes on any gains if the funds are withdrawn and spent on qualifying expenses.
Contributions grow tax free and you will not owe taxes on any gains if the funds are withdrawn and spent on qualifying expenses. Many states also offer deductions for your contributions.
Qualified Tuition Programs (QTPs) (529 Plans)
Is a 529 Plan worth it? These plans allow your savings or investments to grow tax free for you to withdraw and spend on qualified education expenses.
A Qualified Tuition Program, or 529 Plan (named for the section of the tax code that describes it), is a state-sponsored savings account set up to pre-pay for K-12 and college expenses. In a 529 Plan, there is no minimum amount required; you can open one and contribute as little money or up to the annual limit - see below.
You can start a 529 Plan for yourself or your dependents at any point. The owner of the 529 account can make contributions that may be withdrawn by the beneficiary to pay for qualified education expenses at an eligible educational institution that can participate in a student aid program administered by the Department of Education. These institutions include:
- Public, private, or religious K-12 schools (tuition only)
- Colleges
- Universities
- Vocational schools
- Other postsecondary institutions.
Contributing to a 529 Plan: Your contributions are not tax deductible in the year that you make them. There is no immediate benefit for contributing to a 529 Plan, but your account grows tax free - these are the same rules as a Roth IRA. There is technically no annual contribution limit to a 529 Plan as the IRS considers them completed gifts, thus you may pay gift taxes if you contribute more than the gift tax exclusion limit - shown below as well.
Withdrawing from a 529 Plan: As the beneficiary of the plan, withdrawals made and spent on qualifying expenses are tax free.
529 Plans have no age or income restrictions for contributions or withdrawals. The only limit on contribution amounts is that the total contributions may not be greater than the amount needed to pay the beneficiary's qualified education expenses.
Refer to the table below for examples of qualified and non-qualified education expenses.
Tuition and enrollment fees for full-time and part-time students at a college or university
Transportation (airfare, gas, vehicles used for traveling, travel for moving in/out, etc.
Books and supplies required for class attendance (textbooks, lab supplies, pens, paper, printer ink, etc.)
Health insurance and medical services (even if they're billed by university)
Fees required by the school (lab, technology, etc.)
Student loan repayments
Computers, tablets, educational software, and other technology products (if required for class attendance)
Cellphones and other electronics for personal use, college entrance exam fees
Internet access (if not provided by the school and required for class attendance)
Fees for fitness clubs, fraternity/sorority memberships, and other extracurricular activities
On campus/dormitory room and board for student enrolled at least part-time
Lifestyle/personal expenses (mini refrigerators, laundry, etc.)
Off-campus meal and housing costs up to a college or university's allowance amount in their cost of attendance figures (contact the school for details)
Rent or meals over a college or university's allowance amount in their cost of attendance figures (contact the school for details)
Special needs services (wheelchairs and transportation costs)
Home schooling
Qualified education loan payments at a lifetime maximum of $10,000 per beneficiary or sibling of beneficiary.
Summer camp
Coverdell Educational Savings Accounts (ESAs)
A Coverdell ESA is a savings account sponsored by a bank or other financial institution. The account is set up to pre-pay for K-12, college tuition, and other education expenses. The savings account's beneficiary must be at least age 18 (or a special needs beneficiary) to withdraw Coverdell funds. The beneficiary must withdraw the funds before age 30 or the funds will be distributed and taxed. If the age requirements are met, the funds may be withdrawn tax-free if they are used to pay qualified education expenses. If the beneficiary turns age 30 before withdrawing the funds, they may avoid taxation by transferring the account to another qualifying relative or by rolling the ESA into a 529 Plan.
Qualified Education Expenses for Coverdell ESAs
The following expenses are qualified uses of funds from a Coverdell ESA (note that a computer and/or internet access are not covered):
- Tuition
- Books
- Supplies required for class attendance
- Special needs services and expenses
- Room and board (if the student is enrolled at least half-time).
Coverdell ESA Restrictions and Limits
Coverdell ESAs have certain restrictions that 529 Plans do not have:
2024
Single: $95,000-$110,000
Married filing jointly: $190,000-$220,000
2023
Single: $95,000-$110,000
Married filing jointly: $190,000-$220,000
2022
Single: $95,000-$110,000
Married filing jointly: $190,000-$220,000
2021
Single: $95,000-$110,000
Married filing jointly: $190,000-$220,000
Education savings accounts can be complicated, so let eFile.com help you with your 529 and/or ESA if this information overwhelms you. Answer a few simple questions during our tax interview and we will select the right college savings forms for you. Then, we will automatically make the calculations. It's that easy! Contact an eFile.com Taxpert if you have more questions about college savings. Prepare and e-file your next tax return with eFile.com to get the most out of your refund. Plus, gain access to your own personal support page as well as a page of free tax calculators.
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