Avoiding “Tracking-Error Regret”
Written by Andrew Hunt
Written by Jason Hiley
The average price tag for four years at a private college exceeds $170,000, according to the College Board’s Trends in College Pricing 2014. That’s 17% higher than seven years previously. In fact, rising tuition costs are outpacing inflation at the same time that federal grant aid is lagging behind inflation.
While funding four years of college can be a challenge, research also proves that higher education remains a valuable investment. According to the College Board’s Education Pays 2013, in 2011, women with bachelor’s degrees earned 70% more than women with only high school diplomas; college-educated men earned 69% more than men who graduated from high school but did not have college degrees.
There are a variety of savings vehicles and planning strategies that can help you overcome the financial challenges and reach your education goals. One tax-efficient vehicle is the Coverdell Education Savings Account (ESA), which can be used to pay for college expenses, as well as for the cost of attending qualified K-12 schools.
With a Coverdell ESA, funds have the opportunity to grow tax deferred, and withdrawals used for qualified educational expenses, such as tuition, are tax free. A beneficiary can be anyone under the age of 18 (or older, if qualified as a special needs beneficiary). Any individual (including the beneficiary) may make contributions to a Coverdell ESA, as long as his or her modified adjusted gross income for the year is less than $110,000 ($220,000 for married couples filing joint tax returns). Other features include the following:
By expanding the definition of qualified educational expenses to include primary and secondary education expenses, as well as room and board, the Coverdell ESA is proving to be a welcome addition to the various tax-favored options for saving for educational expenses.
Note: Nonqualified distributions may be subject to an additional 10% federal tax penalty on earnings.