Working Paper: NBER ID: w10470
Authors: Susan M. Dynarski
Abstract: This paper examines the incentives created by the 529 and Coverdell tax-advantaged savings accounts. I find that the advantages of the 529 and Coverdell rise sharply with income, for three reasons. First, those with the highest marginal tax rates benefit the most from sheltering income, gaining most in both absolute and relative terms. Second, the tax penalties that are assessed on families whose children do not use their Coverdell accounts to pay for college hit some families harder than others. Strikingly, those in the top two tax brackets benefit more from non-educational use of a Coverdell than those in the bottom bracket gain from its educational use. Finally, the college financial aid system reduces aid for those families that have any financial assets, including an ESA or 529. Since the highest-income families are unaffected by this aid tax, this further intensifies the positive correlation between income and the advantages of the tax-advantaged college savings accounts.
Keywords: 529 plans; Coverdell accounts; tax incentives; education savings
JEL Codes: I22; H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher income (D31) | higher benefits from tax sheltering (H32) |
| top two tax brackets (H29) | greater benefits from non-educational use of Coverdell accounts (D14) |
| presence of assets in savings accounts (D14) | decrease in financial aid eligibility (I22) |