529 vs. Coverdell ESASubmitted by Boyer Financial Services, Inc. on October 4th, 2018
There are a few options when it comes to saving for your child's education. Digging through the information to decide between them can be a challenge and can often lead to one feeling overwhelmed and confused (doesn’t it seem like everything is that way in the investment world!). In order to help with the process, I have created a chart detailing the important information for 529 College Savings Plans and Education Savings Accounts (ESA) so that you can compare the two side by side.
|Tax||Contributions are not tax deductible||Contributions are not tax deductible|
|Earnings grow federal tax free when used for qualified education expenses||Earnings grow federal tax free when used for qualified education expenses|
Can be used for qualified higher education & expenses(as of January 2018 – tax free withdrawals of up to $10k [per year, per bene] can be used for TUITION for private, public or religious K-12)
|Can withdraw funds tax free for a broad range of k-12 expenses/tuition & higher education|
|If used for nonqualified expenses: withdrawals are subject to federal tax and 10% penalty||If used for nonqualified expenses: withdrawals are subject to federal tax and 10% penalty|
|State Tax||Currently over 30 states offer a full or partial tax deduction or credit at the state tax level|
|Income Limits||None||Annual limit gradually phased out if your modified adjusted gross income falls between $190,000 and $220,000 ($95,000 and $110,000 for single filers)|
|Age Limits||None||Can no longer contribute after beneficiary is 18|
|Contribution Limits||None. Gift tax will apply on contributions over $15k ($30k for married filing jointly). There is a lifetime contribution limit with varies depending on plan (normally between $200,000 - $500,000)||
$2,000 annual limit
no lifetime limit
|Beneficiary Change||Account owner can change beneficiary to another member of the family up to two times a year||Account owner can change beneficiary to another member of the family – subject to restrictions|
|Rollover Options||Can rollover funds into another 529 once in a 12 month period||Can rollover funds from Coverdell to a 529 as long as it is the same beneficiary|
|Leftover Funds||Funds not used in college can be held for graduate programs or education later in life||Funds left in account when the beneficiary turns 30 must be taken out within 30 days|
|Financial Aid||Counts as assets of parent if owner is parent or dependent student||Counts as assets of parent if owner is parent or dependent student|
|Investment Options||Subject to individual plan investments and fees||Can offer more investment choices and have lower fees then 529 plans|
|Account Ownership||Donor/Account Owner stays in control of the account||Custodian, until beneficiary reaches the age of majority, then beneficiary|
While both options provide tax advantage ways to save for your student’s education, there are some key differences that are important to consider when choosing the best option.
These simple questions will help you narrow down the decision:
Do you plan to send your child to private elementary or secondary school? If so, then an ESA is most likely the right account for you. Even with the added tuition option on the 529 – that won’t help cover other expenses such as school materials, uniforms, etc.
Are you over the income limit for ESA? This simplifies your choice quickly. If you are, you no longer have the option to invest in an ESA, so the 529 is your only option.
Do you want greater flexibility in contributions and beneficiary changes? Then a 529 is a better option as you aren’t held down to that $2,000 per year contribution limit in an ESA.
*It should be noted that you can also choose a 529 college pre-paid tuition plan. These allow parents, grandparents and others, to prepay tuition at today’s tuition rates for eligible public and private universities. These have less flexibility then a 529 savings plan and are not high on our recommended list. We can chat about these further if you have questions!
Hope this snap shot gives a little clarity. As always, remember the mantra for investing – start early! Give me a call if you would like to discuss an account today.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and LPL Financial, LLC, shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.
This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of LPL Financial, LLC, or any of its affiliates.