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Compare
529 plans and Coverdell
Some caveats
Coverdell accounts have a maximum of $2,000 per beneficiary from all sources per year with contributions until age 18. All money must be withdrawn from this account by time the beneficiary reaches the age of 30 and distributed within 30 days or the earnings will be taxes as ordinary income plus a 10 percent penalty.
529 plans generally have no
restrictions on contributions (gift-tax rules
apply). The income level of a donor may affect
contributions to a Coverdell education savings
account, but does not affect contributions
to a 529 plan.
Financial aid changes and tips
The need-based financial aid treatment of
family assets is determined by whether the
assets are owned by the student or the parents.
A formula assesses a percentage of student
assets and a percentage of parental assets.
Student assets are assessed at a flat rate
of 20 percent (effective July 1, 2007). Parental
assets are assessed on a bracketed scale with
a maximum rate of 5.64 percent. However, parental
assets are partially sheltered by an asset
protection allowance based on the age of older
parents (may be approximately $45,000). Retirement
plans, the net market value of the parents'
primary home and small businesses owned and
operated by the family are also sheltered.
The Higher Education Reconciliation Act of 2005 changed the financial aid treatment of prepaid tuition plans. Previously, the distributions reduced need-based financial aid dollar-for-dollar (100 percent). Effective July 1, 2006, prepaid tuition plans have the same financial aid treatment as 529 college savings plans -- they are treated as an asset and the reduction in financial aid will be only 5.64 percent of the payout of the prepaid account.
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