Planning Briefs

Saving For Private Or Prep School? A Tax-Smart Way

Published Thursday, June 11, 2015 at: 7:00 AM EDT

Does your family have a history of students attending a prestigious private or prep school? You may want to continue this legacy through your own children and grandchildren, but the tuition and related fees for these institutions can be pricey.

Although the tax law provides several tax-favored ways to defray college costs – most notably, the Section 529 plan – those tax breaks generally don’t extend to other schools, with one exception: the Coverdell Education Savings Account (CESA).

You can set up a CESA for anyone, such as a child or grandchild, and contribute to the account. Annual contributions are limited to $2,000. That’s relatively low, especially when compared to Section 529 plans that allow six-figure contributions, but the other advantages of CESAs are similar to those of 529 plans – no current tax on earnings and tax-free withdrawals to pay qualified expenses.

With a CESA, “qualified expenses” cover costs from kindergarten through 12th grade, as well as college. The money may be used for tuition and fees, room and board, uniforms, transportation, books and supplies, academic tutoring, and computers – even Internet access charges.

There’s one major drawback: CESA contributions are phased out for high-income taxpayers. The phase-out for joint filers begins at $190,000 of modified adjusted gross income and ends at $220,000.

This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.

An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.

Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).