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Comparing 529 College Savings Plans and Coverdell Education Savings Accounts

December 17, 2018

Both the 529 College Savings Plan and Coverdell Education Savings Account are tax-advantaged investment accounts that help families pay for education expenses, including both K-12 and post-secondary education. Coverdell ESAs were favored by families saving for both K-12 and higher education expenses. However, due to the recent Tax Cuts and Jobs Act of 2017, a portion of 529 plans can also be used for K-12 expenses. Your income and investment preferences are critical factors in determining which plan is right for you.


529 College Savings Plan

The 529 College Savings Plan was created to allow parents to save money for higher education expenses. Until 2017, the account could only be used for higher education expenses. Parents can contribute up to the lifetime maximum for the plan, which is usually between $200,000 - $500,000, depending on the limit set by each state. There is no limit on the amount that can be contributed each year, but contributions above the annual gift limit ($15,000 per individual, $30,000 per couple in 2018) are subject to gift tax.


Coverdell Education Savings Account (ESA)

The Coverdell ESA is used by families to pay for both K-12 and higher education expenses. The account has limits compared to the 529 plan, requiring contributions to stop at age 18 and all of the money in the account to be used before the beneficiary reaches age 30. However, there are some advantages to the ESA. Unlike the 529 plan in which the plan dictates investments, individuals with an ESA control their investments. Though you can only contribute $2,000 to the account per year, you can use a more aggressive investment strategy to maximize your earnings.


Similar Features of 529 Plans and ESAs

Both the 529 plan and ESA have many similar features. Both are tax-advantaged investment accounts, in which earnings can accrue tax-free. Distributions from these accounts are tax-free as long as they are used for qualifying expenses. If you are completing a FAFSA application, both accounts are viewed as parental assets if the owner of the account is a parent or a dependent student.


Key Differences of 529 Plans and ESAs

Though there are a variety of similarities in the basic structure of the account and how they are treated by both the IRS and federal financial aid programs, the account limits and guidelines vary.


 

529 College Savings

Coverdell ESA

Age Requirement

No

Contributions until the beneficiary is 18; account must be used before the beneficiary is 30

Investments

Managed by plan

Managed by individual

Qualified Expenses

up to $10,000 tuition K-12 tuition; post-secondary tuition, books, computers and laptops, printers, internet, room and board, required equipment

K-12 tuition + plus additional categories of expenses, tuition, books, equipment, room and board for post-secondary education

State Deduction

Some plans

No

Income Limit

No

$95,000 to $110,000 (single) and $190,000 to $220,000 (joint)

Annual Contribution Limit

None, but subject to gift tax over $15,000 per person

$2,000 per year, per beneficiary


Should I choose a 529 plan or ESA?

For many families, the answer is to choose both! Provided you meet the requirements for the ESA, investing in both an ESA and 529 plan simultaneously is a possibility. Many families choose to contribute the maximum $2,000 per year to the Coverdell ESA and commit the remaining amount to a 529 plan. Also, if you plan to use the fees for K-12, rather than higher education expenses, you may prefer to start with an ESA as the account can be used for a greater variety of expenses.