Education Savings: 529 Plans or Coverdell Education Savings?

In Asset Allocation, General Financial Planning, Personal Finance, Personal Financial Planning by Chip Hymiller

There are many different options when it comes to saving for their children’s educations.  There are UTMAs, savings bonds, Roth IRAs, Coverdell Education Savings Accounts (ESAs) and 529 Plans, just to name a few.  Each savings strategy can be different depending on how money will be used, the income of the parents, the future cost of education and when the funds are needed.

The tax law passed in December 2017 made some meaningful changes to 529 Plans. In the past, 529 Plans were very restrictive in how funds could be utilized.  Therefore, we normally recommended those who were eligible, should first contribute to a Coverdell ESA. However, the new tax law removed many of those restrictions making the 529 Plan a more favorable alternative.

The table below summarizes many of the differences between 529 Plans and Coverdell Education Savings Accounts.

529 Plans Coverdell ESAs
Description State supported plans that allow contributions to pay expenses of a designated beneficiary Accounts used to pay for qualified education expenses of a designated beneficiary
Qualified Expenses Higher education expenses including tuition, room & board, fees, books, supplies and equipment

Up to $10,000 per student to pay tuition at a public, private, or religious elementary or secondary school

Higher education expenses including tuition, room & board, fees, books, supplies and 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. The 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)
Contribution Deadline None April 15 for the previous year.

529 Plans have now been expanded to include more qualified expenses as well as primary and secondary school expenses.  Once you couple that with no contribution limits or income limits, it seems that 529 Plans are the best option for most.