With school out, parents and grandparents may be swimming in planning summer activities. The beginning of summer vacation is also a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if the children are in grade school or younger.

One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions are not limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition. 

Other benefits

Other key ESA benefits include:

A sibling or first cousin is a typical example of a qualifying family member, if he or she is eligible to be an ESA beneficiary (that is, under age 18 or has special needs). 


The ESA annual contribution limit is $2,000 per beneficiary. The total contributions for a particular ESA beneficiary cannot be more than $2,000 in any year, no matter how many accounts have been established or how many people are contributing. 

However, the ability to contribute is phased-out based on income. The phase-out range is modified adjusted gross income (MAGI) of $190,000–$220,000 for married couples filing jointly and $95,000–$110,000 for other filers. You can make a partial contribution if your MAGI falls within the applicable range, and no contribution if it exceeds the top of the range.

If there is a balance in the ESA when the beneficiary reaches age 30 (unless the beneficiary is a special needs individual), it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to a 10 percent penalty. But these taxes can be avoided by rolling over the full balance to another ESA for a qualifying family member.

To learn more about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses, please contact your tax advisor.

Have you thought about how you are going to save for your children’s education? There are many available options, but the most well known college savings program is the 529 savings plan. This type of plan has been around since 1996 and is very popular for two main reasons: 

  1. Contributions to 529 savings plans don’t have restrictions on them such as adjusted gross income limitations. Plus they are controlled by the custodian of the account to ensure the funds are used by the beneficiary for educational purposes. A custodian of the account can be a parent, aunt or uncle, or even a generous grandparent, but ultimately does not have to be related to the beneficiary. Custodians are also allowed to establish as many accounts as they want.
  2. Any income earned within the account is tax free as long as it is used for educational purposes like tuition, room and board, fees, books, supplies, and equipment (including computers if needed for enrollment or attendance at a qualified institution).

The income tax benefit to this type of plan (besides tax-free earnings) is the potential to reduce your taxable income on your state tax return by subtracting the amount of your contribution. For instance, with the Colorado income tax rate at 4.63%, a contribution of $25,000 could save you almost $1,200 in Colorado taxes!  

Things to remember when using a 529 savings plan as a Colorado state tax savings tool:

Please contact us if you would like to know more or to discuss how a 529 savings plan could benefit both you and your student.