Educational Savings Account Comparisons

If you are trying to decide on a type of education savings account for your children, but are confused about the different options, you are not alone. Many parents are confused as to what type of account they should choose. They are left trying to sort through a Coverdell ESA and a College 529 plan. While both plans have some benefits, each one is good for different people. Depending on your situation, you could benefit from either one. Here are some facts about each one to help you compare.

Coverdell

The biggest advantage of a Coverdell plan is flexibility. It is often called the Education IRA because you have more control over the process just like you do with an IRA. You can choose what you invest in and you have more investment options. You can reallocate the funds in the account as often as you like and oversee the entire process. There are a few details tied into the plan that are important:

  • Not just for college- With a Coverdell plan, you can use the funds on any qualified education expense. This means that you can use the funds for preschool, elementary, middle and high school if you wish. They do not have to be used on college funds. This allows you to fund your child's entire education with the plan.
  • Annual maximums- With a Coverdell plan you can contribute an annual maximum of $2000. The money goes into the account after-tax and is allowed to grow tax-free. 
  • Contributor restrictions- Any adult can contribute to the plan as long as they meet the income requirements. If you are a single adult you cannot make more than $95,000 and if you are couple you cannot make more than $190,000, combined income. 
  • Child takes over- With this type of account, the child can gain control of the account once they reach the age of college. If they do not use the money by the time they are 30, they can withdraw the money with penalties. If they do not wish to do this, they can pass the money onto another child to use.

529 Plan

The 529 plan can only be used for college, there is no provision to fund primary education costs. There are a few key features of this plan:

  • Higher contribution limits- The limits for contribution in a 529 plan are much higher than a Coverdell plan. Depending on which state you live, you can put anywhere from $100,000 to $350,000 into the plan. 
  • No income restrictions- Unlike the Coverdell plan, anyone making any amount of money can put money into a 529 college savings plan. Therefore, if you make more than $190,000 as a couple, this will be your only option.
  • Parent controls account- Unlike the Coverdell, you can control the 529 account money when they reach the age of college. If you feel like your child should not be in control of such a large sum of money all at once, you can allocate the funds where they need to go and let your child focus on school. 



How do you qualify for a Coverdell education savings account?



A Coverdell education savings account has rules associated with it that prevent certain people from contributing. If you make over a certain amount of money, you will not be able to make any contributions to an account for your children. As of 2010, if you are single, you can make a full contribution if you make less than $95,000. You can make a partial contribution if you earn up to $110,000. If you are married and you file your taxes jointly, you can make a full contribution if your income is no more than $190,000. You can then make a partial contribution if you earn up to $220,000.

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