Coverdell vs 529: Understanding the Differences

Many parents are left trying to decide between a Coverdell plan and a 529 savings plan for their child's education needs. While tuition costs are rising every year, salaries are not. Therefore, it becomes necessary to take advantage of every advantage that you are given financially. Both Coverdell plans and 529 plans are designed to be an advantage for you in your journey to save money for your child's education. While they both have some advantages, depending on your situation, one might be better than the other for you. Here are the basics of both Coverdell and 529 plans. 

Coverdell Plans

Coverdell plans are often referred to as "Education IRA's". This is basically a tax-advantaged savings account for your child's education needs. Each year you can contribute up to $2000 into the account. The money that goes into the account is after-tax. However, once it is in the account, it can accumulate and be distributed tax-free.

Any adult can put money into the plan regardless of whether they are a parent, grandparent, or family friend. In order to be able to contribute, they have to meet the requirements of making a maximum of $95,000 as a single person or $190,000 as a couple. 

When you are investing the funds from your account, you will typically have a little more flexibility on what you can invest in. You will have many options and there is no limit on how many times you can reallocate investment funds.

The unique feature of Coverdell plans is that they do not have to only be used solely for college expenses. If you want to use the funds from a Coverdell to pay for preschool, middle school, or high school, you can do so. This gives you a lot of flexibility and can allow your child's entire education to be paid for with tax-advantaged funds. 

Once the funds are in the account, your child has to use them before they hit the age of 30. If they do not use the funds, you can change the beneficiary of the account to another child for their use with no penalty. If no one uses the funds, you can cash it out with penalties. 

529 Savings Plan

With a 529 savings plan, you can only use them for college expenses. There is no option to allow you to use them on private schools as they are growing up. With this type of plan, depending on the state in which you live, you can remain in control of the account instead of transferring it over to your child once they are of age. 

With a 529 plan, there are no income restrictions. You can make as much money as you want and still put money into the plan for your child. The limits are a lot higher on how much you can contribute as well. Depending on the state in which you live, the limit could be somewhere between $100,000 and $350,000. As far as investments go, you can only change the allocation of funds twice per year. 

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