Clients with children are quite special to us. We are all family people at our firm, so helping each other is what America is all about. Thus, we wanted to spend this advice time speaking to those who wish to save for their children’s education.

It seems the hottest product these days is an Internal Revenue Code (IRC) Section 529 account. There has been a lot of publicity over the years on these as the annual contribution limits are quite high, plus there is a catchup for those who wish to make contributions in the current, for years when they didn’t. The other benefit is that it offers a State income tax deduction when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board. No one wants to diminish any tax savings as part of something mom and dad want to do anyway, but let’s face it, most of our Federal tax rates are higher by multiples of our State tax rates, and currently, high tax States are seeking to reorganize their form of taxation to minimize the effect of the limitation on State and local taxes. So, we have little idea of what the State benefit will be starting this year.

A IRS Section 529 plan is a program set up to allow you to either prepay, or contribute to an account established for paying, a student’s qualified education expenses at an eligible educational institution. Whoever purchases the Section 529 plan is the custodian and controls the funds until they are withdrawn. Our favorite sources for information plans is

529 plans are now allowed to distribute not more than $10,000 in expenses for tuition incurred during the taxable year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. Realize that such limitation is on a per-student basis thus a child may be the designated beneficiary of multiple accounts, that child may receive a maximum of $10,000 in distributions. So, you may need to communicate with Grandma and Grandpa if they have also planned for your children as it is not on a per-account basis

For those who aren’t trusting the education system, expenses to include certain expenses incurred in connection with a homeschool. If you might be interested, those expenses are (1) curriculum and curricular materials; (2) books or other instructional materials; (3) online educational materials; (4) tuition for tutoring or educational classes outside of the home (but only if the tutor or instructor is not related to the student); (5) dual enrollment in an institution of higher education; and (6) educational therapies for students with disabilities.

Another option for the kids is the Coverdell Education Savings Account (ESA) which has now become the savings account of choice. Annual deposits are allowed, earnings are exempt from tax and the money may be used for college, high school or elementary school, including private schools. Withdrawals used for education expenses from the account, are tax-free.

The annual contribution limit is $2,000 for each beneficiary no matter how many accounts exist for that beneficiary or how many individuals or whom contributes. Contributions to ESA’s must be in cash and must be paid to a qualified trustee, generally any entity which qualifies as a normal IRA trustee, before the beneficiary reaches 18.

The balance in the account must be distributed by the earlier of the beneficiary’s: Reaching age thirty (within thirty days); or death. Contributions may be made to both an ESA and a 529 plan in the same year for the same beneficiary.