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Changes Coming to Education Plans in 2011

WASHINGTON (TheStreet) - Saving for a child's education costs can be one of the most daunting and confusing tasks.

There will be a few changes coming for education savings plans in 2011. Depending upon what Congress does with tax legislation between now and the end of the year, these changes may or may not see the light of day.

Coverdell Accounts

This less-popular "cousin" of the 529 plan will undergo two major changes in 2011:

  • Annual contribution limit reduced from $2,000 to $500
  • Qualified distributions are only allowed for post-secondary education

This qualified distributions change will only impact people who planned to use Coverdell money for private elementary or high school tuition. Given the contribution limit, the Coverdell is often a secondary consideration when compared with a 529 plan -- with one notable exception, which I'll get to next.

529 Plans

These plans have much higher contribution limits than Coverdell plans. Each plan, which vary by state, may have a lifetime contribution limit of $235,000. Nonetheless, there is a change coming in 2011 for 529 plans that you might find troublesome:

  • Users can no longer use distributions to buy computer equipment and services.

This provision only applies to tax years 2009 and 2010. So, if you're planning to use 529-plan money to pay for computers or services, do it before the end of 2010.

In contrast, Coverdell funds can still be used to buy computer equipment, which will give it a leg up on the 529 plan in 2011 among people saving money for non-tuition costs.

-- Written by contributor Jim Blankenship, an Illinois-based financial adviser.

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