Is an Education Savings Plan Better than a 529?

An education savings account is a great idea for your children or grandchildren. The cost of college is high, and student loan debt is a burden to graduates that are new to the workforce. For a parent, the gift of a college education is a gift for opportunity for her future. There are two main options for saving for college: the 529 plan and the education savings account. The plans are also called the Coverdell ESA or the Education IRA. Each plan offers it's own benefits and drawbacks and should be carefully considered.


The ESA and 529 have several similarities. Both are used for saving for college. The withdrawals made are only for qualified expenses. Both plans allow you to contribute to the plan without the expense of taxes. Withdrawals from these accounts are tax free. The ESA has one big advantage over the 529; your contributions can be used to pay for primary and secondary education, as well as college.


The ESA plan can help you pay for private schools. A 529 is strictly for college savings. The ESA comes with strict guidelines. You can only contribute $2,000 per child per year into the account. There area also income limits. If a married couple makes more than $190,000 per year, they would not be able to contribute to an ESA. Also, you can only contribute to an account for a child under 18 years of age and you must make withdrawals before 30. An ESA allows unlimited changes to investment allocation and offers a wider selection of investment choices.

The 529

The 529 plan is offered by private parties and by state governments. Often there is a state income tax deduction for 529 plan contributions. A 529 can be used only for college. The contributions can be made at any age, and withdrawals can be used at any age. For example, if your child does not attend college, but at age 30 decides he wants to got to school, the money is still available to use. The biggest advantage of the 529 is that they offer two plans: a savings plan and a prepaid tuition plan. An ESA plan only offers a savings plan. A 529 offers a prepaid tuition plan which allows you to pay for today's tuition rate. You can prepay as many semesters as you wish, at today's rates.


If you must choose only one plan, the 529 is usually the best choice for most families, unless the funds are needed to pay for education of  k-12. However, most people do not have to choose and can get both types of plans. With both plans, you have the best of both worlds. You can choose the ESA, and the higher allowed contributions and flexibility of the 529 plan make it easier to pay for college later.

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