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Coverdell Education Vs. 529 Plans - What is the Difference?

May 26, 2012

Everyone who is looking to save money for a child's education expenses often face a choice between Coverdell ESA and 529 plans, the two most common available. The 2 plans have many similarities but a few distinguishable differences too. Those exploring education savings program choices had better consider the advantages and disadvantages of both

The Coverdell ESA has many of the same features of an Individual Retirement Plan (IRA). That's why it's called the Education IRA. Both plans allow you to contribute a certain amount of money each year, grow the money tax free and withdraw the money at a particular time. The yearly contribution limit for the Coverdell ESA plan is $2,000, and the deadline to contribute to the plan is the end of the tax filing year. The plan has income requirements individuals must conform to to setup an account. To meet eligibility requirements, single taxpayers must have income levels between $95,000 and $110,000. Married taxpayers, filing jointly must have adjusted gross incomes between $190,000 and $220,000.


Coverdell Advantages & Disadvantages


Among the primary advantages of the Coverdell ESA is that individuals could use the funds towards elementary and secondary education expenses, as well as college. Another advantage is that contributed funds grow tax free and the withdrawals are tax-exempt if they don't exceed the beneficiary's education cost. A disadvantage is that the money in the account is considered as income and brings down the amount of federal financial aid a student can receive. Also against it are the penalties the plan incurs if the beneficiary doesn't make withdrawals prior to 30 days after turning 30.

529 Plan Features


The 529 plan doesn't have a contribution limit and does not have income eligibility guidelines. The beneficiary of the 529 plan doesn't have to use the funds by a certain age. The 529 plan only pays the education expenses at accredited colleges and universities. Students and parents don't have to use the funds in the state the account was opened. Nevertheless, a few states offer extra benefits to individuals that use the money for college expenses in their state.

529 Pros and Cons


An advantage of the 529 plan is that everybody is qualified to take part. Similar to the Coverdell plan, the money in a 529 account grows tax free and doesn't suffer tax penalties when money is withdrawn. The disadvantage of the 529 plan is that money contributed is invested in the stock market, so if the stock market is doing poorly the plan performs poorly as well. Another disadvantage is that parents are expected to pay at least 5.64 percent of the student's education expenses. So, the 5.6 percent is counted in the expected family contribution (EFC) amount when applying for federal financial aid.


1 comment

  1. I like the flexibility of having the Roth IRA. The truth is if you don't use your 529 Plan money and later have to withdraw it, there will be a penalty.

    ReplyDelete

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