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Tax-Free Student College Savings Plans - QTP, ESA, 529

There are two tax-free savings plans available to students and to those paying for someone's education. One of the savings plans is a state-sponsored account, the other is a special account sponsored by a bank or other financial institution. Both plans allow you to save money for college expenses and to withdraw the funds tax-free.

Qualified Tuition Programs (QTPs) - 529 College Savings Plans

A Qualified Tuition Program, or "529 Plan" (named for the section of tax code which describes it), is a special state-sponsored savings account set up to pre-pay for college expenses. The owner of the 529 account can make contributions which may be withdrawn by the beneficiary when they attend college (or other eligible educational institution). The money in the account may be withdrawn tax-free if the funds are used for qualified education expenses at an eligible college, university, or other institute of higher learning.

529 Plans have no age or income restrictions for contributions or withdrawals, and the only limit on contribution amounts is that the total contributions may not be greater than the amount needed to pay the beneficiary's qualified education expenses.

Qualified Education Expenses for 529 Plans / QTPs

The following expenses are qualified uses of funds from a 529 Plan:

  • Tuition
  • Books
  • Supplies required for class attendance
  • Computer (if required for class attendance)
  • Internet access (if not provided by the school, and if required for class attendance)
  • Room and board (if the student is enrolled at least half-time)
  • Special needs services

Coverdell Educational Savings Accounts - Coverdell ESAs

A Coverdell ESA is a savings account, sponsored by a bank or other financial institution, set up to pre-pay for K-12, college tuition, and other education expenses.  

The savings account's beneficiary must be at least age 18 (or is a special needs beneficiary) to withdraw Coverdell funds, and must withdraw the funds before age 30 or the funds will be distributed and taxed. If the age requirements are met, the funds may be withdrawn tax-free if they are used to pay qualified education expenses. If the beneficiary turns age 30 before withdrawing the funds, they may avoid taxation by transferring the account to another qualifying relative or by rolling the ESA into a 529 Plan.

Coverdell ESA Restrictions and Limits

Coverdell ESAs have certain restrictions that 529 Plans do not:

  • Funds must be withdrawn or transferred after the beneficiary is age 18, but before age 30
  • Qualified expenses do not include computers or internet access
  • You may not contribute if your income is more than $110,000 ($220,000 if married filing jointly)
  • There is a maximum annual contribution of $2,000 per beneficiary (not per account and not per contributor)

Qualified Education Expenses for Coverdell ESAs

The following expenses are qualified uses of funds from a Coverdell ESA (note that a computer and internet access are not covered):

  • Tuition
  • Books
  • Supplies required for class attendance
  • Special Needs Services and Expenses
  • Room and Board (if the student is enrolled at least half-time)

Related Student Tax Information & Tax Help

Find out about special tax deductions for students and valuable student tax credits.

Find more details about education taxes in IRS Publication 970-Tax Benefits for Education.

Find tax information for students, including helpful tax tips.

Use our Free Tax Tools to help calculate taxes, or determine eligibility for credits.