The Differences Between a Coverdell and a 529

If you are trying to decide between a Coverdell education savings plan and a 529 college savings plan, you have to understand each plan first. Both options are meant to assist you in your savings for education and both plans offer definite advantages. Depending on your income, you can benefit from one more than other.

529 College Savings

  • College only- As the name implies, this particular savings account can only be used for college expenses. You can prepay tuition at a particular university or you can simply save for general college expenses.
  • Guardian controlled- With this type of loan, the owner of the plan can maintain control of it. This allows parents to oversee their child's education expenses instead of handing over the controls of a large sum of money to a young adult. Many parents prefer this method because it allows their child to focus on school instead of worrying about their expenses. 
  • Contribution limits- With this type of plan, you can put between $100,000 and $350,000 of money into it depending on the state in which you reside. This is much larger than what you can get into a Coverdell account.
  • No income restrictions- Any adult can contribute to a 529 college savings plan regardless of how much they make. 
  • Tax advantages- The money that goes into a 529 plan is made with after-tax dollars. Once it is in the account, the government will not take anymore. It can grow as big as possible and no taxes will be taken out. As long as the money is used on secondary education, there will be no taxes upon distribution either. 

Coverdell ESA

  • Investment flexibility- With a Coverdell savings plan, you will often get much more flexibility in your investments, as compared to a 529 plan. There are typically more options to invest in and you can reallocate the funds more often. With a 529 plan, you can only reallocate the funds twice per year. With a Coverdell plan, you can reallocate them as much as you want.
  • Primary education- Unlike a 529 plan, you can use the funds from this plan for any qualified education expense. If you wish to send your child to a private preschool, elementary school, middle school, or high school, you can use the funds from this for the expenses. This allows you a lot more flexibility with the funds instead of only using them for college.
  • Contribution limits- With a Coverdell ESA, you can only contribute a maximum of $2000 per year.
  •  Income restrictions- This type of plan has income restrictions on who can contribute. If you are single and make more than $95,000, you cannot contribute. If you are married and jointly make more than $190,000 you cannot contribute. This restricts the wealthier from contributing to this type of account.
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