529 College Savings Plan vs. Coverdell ESA

Daniel Penzing
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The 529 College Plan

The 529 College Savings Plan is an investment vehicle specifically designed to help parents, grandparents, and others save money to help pay for college for their children or grandchildren. It was established under Section 529 of the Internal Revenue Code, and it provides tax advantages.

The money in a 529 Savings Plan can be invested in mutual funds so that it will grow. It doesn’t have to be invested in government guaranteed savings bonds. In fact, many people don’t want to invest in government guaranteed savings bonds because they can be used to pay for college. People who participate in a 529 Savings Plan can choose how to invest their money. This flexibility makes it more likely that your investment will grow.

The money in a 529 Savings Plan can be used to pay for children’s or grandchildren’s college because it has already been taxed. This means that you can withdraw money from a 529 Savings Plan without paying any taxes. This will help you save on taxes today and will also help your money stretch further over time.

529 College Savings Plans are a good alternative to a Coverdell Education Savings Account. There are two reasons why a 529 Savings Plan may be a better alternative than a Coverdell ESA.

The Coverdell ESA

(Education Savings Account) and 529 College Savings Plans are both created for the same purpose: to aid families in saving for school expenses, including college costs.

Because the Coverdell ESA and 529 plan are so similar, people often wonder which plan is better for them and how they function.

Both plans have the following features in common:

Both plans can be opened by anyone, no matter the age of the beneficiary(s).

Contributions from an individual may equal up to 5 years of primary education (K-12) tuition.

Contributions are not taxed in the year they are made.

There is a general power of appointment, meaning that any remaining funds can be passed on to any other beneficiary.

Both plans offer tax-free growth and tax-free withdrawals when used for educational purposes.

Contributions can be made into an individual account or in the name of a custodian.

Withdrawals from these plans are federally tax-free.

There are several differences between the Coverdell ESA and 529 plans. Here is a rundown of the key differences:

The most significant benefit of 529 plans is that they are often matched by the state in which you reside. In some cases, residents can double or triple their contributions to the 529 plan. These match programs help states make college bound students more aware of the benefits of saving for college.

Which Plan Is Better?

The 529 plan and the Coverdell education savings account (ESA) are both popular ways to save for college. 529 plans and Coverdell ESAs both offer tax breaks, make it so you don’t have to pay tax on your income when you take out the funds, and allow you to use the money for qualified education expenses. The main difference is that the Coverdell ESA is a custodial account, meaning you control it until the money is used, while a 529 plan is a trust account, meaning you give the money to the state, which becomes the account holder, and your money grows tax free until it is spent on college. Both types of accounts can be set up similarly to a savings account, with tax-free withdrawals for college, and both let you pay for tuition, books, and living expenses for someone else. Both also have unique characteristics that the other type lacks so we’ll take a look at them below.

529 Plans

529 plan advantages:

Open to anyone, no matter your state of residence, as long as you plan to use the money for education.

Can be opened at any age and you have an unlimited time to save.

You can change the beneficiary if the recipient gets a scholarship or decides not to use the money for college.

If you have a 529 plan from your state, there may be a state income tax deduction.