High-Income Families Benefit Most from New Education Savings Incentives

Brief

High-Income Families Benefit Most from New Education Savings Incentives

February 28, 2005

Abstract

If funds from education savings plans are not used for schooling, the penalties more than offset the tax benefits for lower-income families. But higher-income families gain even if their children do not go to college. A new breed of tax-advantaged savings vehicle has emerged for the college bound. Earnings on both the federal Coverdell Education Savings Account (ESA) and the state-level 529 savings plan are tax-free if the funds are used for postsecondary education. One reason that the advantages of these education plans rise sharply with income is that that those with the highest marginal tax rates benefit the most from sheltering income. This brief explains how these new college plans work.

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