529 Savings Plans vs. Coverdell Education Savings Accounts (ESA)
June 12th, 2006So you've made the decision to save for your child's education. What type of account is best for doing this? I have already expressed my opinion about the Upromise plan (or other similar savings systems). That leaves you with basically two options; the 529 plan or the Coverdell Education Savings Account (ESA). I would recommend a 529 plan to almost anyone for all the reasons outlined below. There just doesn't seem to be much benefit in selecting an ESA over a 529.
- Age Limit - the beneficiary of an ESA has to be under age 30. There are NO age limits on the beneficiary of a 529. With the growing number of adults going back to school having a flexible age limit is a huge bonus.
- Deadline for Using Funds - this coincides with the age limit above. ESA funds have to be used by age 30 of the beneficiary. There is no such age limit requirement on 529s. Funds can be used over the lifetime of the beneficiary.
- Maximum Contribution - an ESA has a maximum limit of $2000 per beneficiary per year (not per contributor!). 529 savings plans limits vary by state but their aggregate contribution limits range from $100k to $365k depending upon the state.
- AGI Threshold for Phase Out - ESA plans have an AGI threshold after which contribution limits are phased out to zero (this was $190k-$200k for MFJ during 2005). 529 plans have NO AGI limits. Anyone with any salary can contribute to a 529 plan!
- Control of the Account - in most states the assets of an ESA become the property of the beneficiary at age 18. The opposite is true for a 529. In most states the account ownership remains with the contributor for the duration of the account.
- Taxation of Contributions - ESA contributions are NEVER deductible for either federal or state tax purposes (note: for both plans the earnings are what receive most of the tax benefit). Some states allow 529 contributions (up to a limit) to be deducted from STATE income for tax purposes.
Those are just a few of the differences in the two types of accounts that favor the 529 over the ESA in my opinion. There are other differences that don't make a meaningful impact in the decision process.
In fairness, the only thing I can find that favors the ESA over the 529 plan is what is included in the definition of "qualified withdrawal". ESAs allow you to use funds to pay for computers, internet access, supplies, and other things necessary for school. 529 plans only allow funds to be used for room, board, tuition, and fees. ESAs can also be used beginning with Kindergarten whilst 529 plans can only be used for higher education.
If you're sending your kids to private school for the duration of their lives then an ESA may be something to look into. Otherwise, the best choice seems to be the 529 savings plan hands down.
"Education is a crutch with which the foolish attack the wise to prove that they are not idiots."
-Karl Kraus
Disclaimer: this post is for informational purposes ONLY. Please read the disclaimer before even thinking about relying on me to make a financial decision!
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