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Coverdell Education Savings Account (formerly known as an education IRA)
Tax benefit: Earnings in the account grow tax-free until withdrawn. Withdrawals are tax-free if they do not exceed the beneficiary’s qualified education expenses for the tax year.
Impact on financial aid: Money in a Coverdell account is considered a student asset, and financial aid officers expect students to contribute 35 percent of the money toward college expenses each year.
Can the account be rolled over? Yes. Any amount can be withdrawn and rolled over into a Coverdell account for another family member. There are no tax consequences if the new beneficiary is under the age of 30.
Prepaid tuition plan
Tax benefit: Earnings in the account grow tax-free. Withdrawals are tax-free as long as the money is used for higher education.
Impact on financial aid: A prepaid tuition plan is considered a resource of the student and reduces aid on a dollar-per-dollar basis.
Can the account be rolled over? Money in the account may be transferred tax-free to the prepaid tuition plan of a family member.
529 savings plans
Tax benefit: Earnings in the account grow tax-free. Withdrawals are tax-free as long as the money is used for higher education.
Impact on financial aid: Money in a 529 plan is considered a parent’s asset, and financial aid officers expect parents to contribute 5.6 percent of the money toward college expenses each year.
Can the account be rolled over? Money in the account may be transferred tax-free to the 529 plan of a family member.
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