Funding Your Education and Increase Tax Savings

Graduates in black gowns throw caps into the bright blue sky in celebration.

Both QTP’s and ESA’s are two types of tax-advantaged savings plans designed to help individuals who are interested in saving for education expenses. 

1. Qualified Tuition Programs (QTPs) – also known as 529 Plans
A QTP, or 529 plan, is a state-sponsored program that allows you to save for qualified education expenses.

Types of 529 Plans:
  • Prepaid Tuition Plans:  Lock in tuition at current rates for future education.
  • Education Savings Plans: Invest funds in various portfolios to grow tax-free.

Key Features: 

Feature                                                               Details

Tax Benefits                                                      Earnings grow tax-deferred and withdrawals are tax-free if used for qualified education                                                                                                 expenses. Some states offer state tax deductions or credits.

Qualified Expenses                                         Tuition, fees, books, supplies, computers, and even K–12 tuition (up to $10,000/year).

Contribution Limits                                         High—often over $300,000 per beneficiary, depending on the state.

Account Owner Control                                 The account owner retains control, even after the beneficiary reaches adulthood.

Financial Aid Impact                                       Considered a parental asset for FAFSA purposes, which is favorable.

State Specific                                                    Each state has its own plan, but you can invest in any state's plan.


2. Education Savings Accounts (ESAs) – also known as Coverdell ESAs
A Coverdell ESA is a tax-advantaged trust or custodial account created to pay for qualified education expenses.

Key Features:

Feature                                                                Details

Tax Benefits                                                       Earnings grow tax-deferred and withdrawals are tax-free for qualified education                                                                                                              expenses.

Qualified Expenses                                           K–12 and higher education expenses, including tuition, books, supplies, academic                                                                                                             tutoring, and even room and board.

Contribution Limits                                          $2,000 per year per beneficiary (total from all sources).

Income Limits                                                    Contributions phased out for modified AGI > $95,000 (single) or $190,000 (joint).

Control                                                                 The beneficiary gains control at age 18 (unless a special needs beneficiary).

Age Limits                                                           Contributions allowed until the beneficiary is 18. Must use funds by age 30, unless special                                                                                             needs.

More Investment Flexibility                            Typically more choices than 529 plans.


COMPARISON POINTS:

Feature                                                                529 Plan                                                           ESA (Coverdell)

Max Contribution                                             Varies by state (~$300,000+)                       $2,000/year per beneficiary

Income Limits                                                   None                                                                  Yes (AGI-based)

Tax-Free Growth                                               Yes (for qualified expenses)                         Yes (for qualified expenses)

Qualified Expenses                                          College + $10k K–12                                        K–12 + college (more flexible)

Investment Options                                         Limited (state plan options)                       Broad (self-directed allowed)

Control of Funds                                              Account owner                                               Transfers to beneficiary at age 18–30

Use by Age                                                        No age restriction                                          Must use by age 30 (unless special needs)