Education Savings Plans Video - ExamPrep.ai CPA Review

Lesson: Education Savings Plans

In this lesson, explore the intricacies of education savings plans such as the 529 and Coverdell plans with Nick Palazzolo, CPA, to understand how these tax-advantaged plans assist in saving for future educational expenses. Nick breaks down the differences between the two types of 529 plans, the prepaid tuition plan and the college savings plan, and covers the tax-free growth and withdrawals associated with these plans when used for qualified education costs. Moreover, he illustrates through clear examples, the tax benefits and potential savings when comparing both 529 and Coverdell plans to a normal taxable account, emphasizing the substantial value these plans can provide in reducing the financial burden of educational expenses. The lesson also delves into contribution limits, eligibility requirements, and the consequences of non-qualified withdrawals. Through Nick's guidance, gain valuable insights into how to strategically utilize these savings vehicles for educational funding.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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All right, we've got a few plans talking about our education. Now we've got a 529 plan and a Coverdell plan. These are two different types of plans, and we will compare them. First, we're going to go through the 529 plan. Now this is a tax advantage savings plan, just like a retirement account, just like a Roth, just like an IRA, 401k. Those are referred to as tax advantage. Why is that? Because you're paying a lot less taxes on it. Generally, you don't pay taxes on the gains generated through that, but we'll talk about that more in specifics. Tax advantage savings plan designed to help individuals save for future college costs. These plans are sponsored by states, state agencies, or educational institutions, and they're authorized by the IRC. So they're sponsored by these groups, but they're authorized by the IRC. So these groups have to run it by the IRS, make sure that they have an eligible legitimate plan. We've got two types. We've got a prepaid tuition plan and a college saving plan. Now the tax implications of this include, it's quite similar to a retirement account, very similar, except instead of withdrawing it when you're 59 and a half, you are going to use it for college expenses. Now we've got tax-free growth earnings in the 529 plan for tax-free at the federal level and often at the state level too. This means that any interest dividends or capital gains, so maybe you're doing a little stock trading in that account generated within the plan are not subject to taxes, allowing the account to grow more quickly than a taxable account. If you have a normal investment account, you've got to pay taxes on the dividends received every year on the gains and losses

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