529 Plans vs. Coverdell ESAs: Which College Savings Account is Best?

Making a decision on an education savings account can be a difficult choice. There are many different factors that go into an education savings account that make it necessary to evaluate your current situation. The main two types of education savings accounts that are available are Coverdell education savings accounts and 529 college savings plans. Both instruments are unique and should be evaluated separately. Here are a few things to consider about each type of account.

Contributions

Both types of accounts have tax advantages. The contributions that you make into either one are made with after-tax dollars. Once the money is in the account, it can grow without ever paying taxes on it. This makes either account very similar to a Roth IRA. If you use the money on education expenses, you will not have to pay taxes on the distribution of the funds. 

Each type of account has maximums that you can put into it. With a Coverdell plan, you can contribute up to $2000 in each calendar year. A 529 plan's limits depend on the state in which you live. However, the limits range to a maximum of $100,000 to $350,000. Therefore, you can put a lot more into a 529 plan than you can a Coverdell.

The Coverdell plan also has income restrictions on who can contribute. If you are a single adult that makes more than $95,000 you cannot contribute. If you are a married couple that makes more than $190,000 you cannot contribute. A 529 plan has no such restrictions on income. Therefore, if you are wealthy a 529 plan is a better option for you.

Investments

Once the money is in your account, each account differs in how you can handle the money. With a Coverdell ESA, you can usually have more options in which to invest. In addition to more options, you can reallocate the funds within the account as often as you like into different investments. With a 529 plan, you are limited to doing so twice per year. 

Distributions

With a Coverdell ESA you can use the funds for any qualified education expense. This includes sending your child to preschool through high school if you desire. With a 529 plan, the funds are limited to secondary institutions only. There is no provision for primary education with the funds. 

Once the child reaches college age, the plans differ significantly. With a Coverdell plan, the account goes into the control of the student. They can then use it however they want. They can cash it out with penalties if they desire. 

With a 529 plan, the parent can remain in control of the money and distribute it as they see fit. This can be a major benefit to parents that are worried about giving control of a large sum of money to their college-age children. You will have to evaluate each option and determine which one is better for your family.