Coverdell Education Savings Accounts vs. 529 Plans

In College & Education Savings, General Financial Planning, Personal Finance, Personal Financial Planning by Chip Hymiller

Parents have many different options when it comes to saving for their children’s educations.  There are UTMAs, savings bonds, Roth IRAs, Coverdell Education Savings accounts and 529 Plans, just to name a few.  Each person’s savings strategy is different depending on how the money will be used, the income of the parents, the future cost of the education and the time frame.     

Currently, 529 Plans are receiving a great deal of media attention.  While they are a good option for some, there are other plans to consider.  One such alternative is the Coverdell Education Savings Accounts.  Below we have highlighted the differences between 529 Plans and Coverdell Education Savings Accounts (ESAs).

529 Plans

Coverdell ESAs

Description State Supported Plans that allow contributions to pay expenses of a designated beneficiary Accounts similar to Roth IRAs used to pay qualified education expenses of a designated beneficiary
Qualified Expenses Higher Education Expenses including tuition, room & board, fees, books, equipment Higher Education Expenses including tuition, room & board, fees, books, equipment Primary & Secondary Expenses including tuition, room & board, fees, books, equipment, uniforms, and computers
Ownership Anyone.  Beneficiary & Owner do not need to be related. Beneficiary or Parent
Age Limit None No contributions after age 18.Balance must be distributed by age 30.
Contribution Limits No annual limit $2,000 per beneficiary per year.
Contributors Anyone, No Income Limits Anyone as long as their income is less than $220,000 (MFJ) or $110,000 (Single)
Deadline for Contributions None April 15 for the previous year.

The 529 Plans are best used in situations where the income of the contributor is high or as an estate planning technique.  The Coverdell Savings Accounts are best utilized as a supplement to other college savings plans.  A Coverdell account can be especially useful if you think that your child is likely to attend a private elementary or secondary school.

For more information on 529 Plans, you may find our blog post “529 College Savings Plans FAQ” to be helpful.

If you have questions about your education savings strategy or if you think one of these plans might be a good alternative for you, please call us to set up an appointment to discuss your specific needs.