Are there any obvious differences or is it helpful that we suggest such a topic as Education Savings Accounts vs 529 plans in the scheme of everything that concerns higher education. As a parent, you want to ensure your child has the brightest future possible, including access to higher education.
Unfortunately, attending college or a career school can be expensive, even if your child is lucky enough to get a scholarship. That’s why it’s important to start saving for their college education as early as possible. The ESA, which is also known as Coverdell education savings account is a tax advantaged investment account in the U.S. designed to encourage savings to cover future education expenses (elementary, secondary, or college), such as tuition, books, and uniforms (for the same year as the distribution).
While the 529 plans is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
Education Savings Accounts vs 529 Plans
What then can be known when we place the Education Savings Accounts vs 529 plans in a context of parents’ choices of higher education packages? Well, this article is not designed to choose for you, since you will have to be the one to see through and pick the best that suits your status:
Education Savings Account
The Coverdell ESA used to be called an Education IRA (individual retirement account) because, like an IRA, it allows you to contribute up to a certain amount each year. Currently, that amount is $2,000 per year until your child turns 18.
The money grows tax-free, and you can withdraw it without paying taxes as long as it’s used for qualified education expenses, such as college tuition, fees, books, and other school expenses. Funds from the Coverdell ESA can also be used for K–12 education expenses, like private school tuition, academic tutoring, and computers.
This education savings account isn’t for everyone, though. If your modified annual gross income is over $110,000 ($220,000 if filing jointly), you may not be eligible to open an account. Additionally, if you do open an account and your child doesn’t go to college or doesn’t use all of the money for education expenses by the time they turn 30, the remaining amount will be disbursed to them, and they will be taxed on it.
Named for Section 529 of the Internal Revenue Code, the 529 plan is a tax-advantaged savings and investment program. Unlike the Coverdell ESA, 529 accounts can be used to invest for any future student, regardless of age. That means you can start one for your child, a grandchild, or even yourself. If you decide to change the beneficiary to another family member, you can do so at any time without a penalty.
There’s no cap on yearly contributions, but there is a total maximum contribution over the life of the account, currently $550,000. You can save as little or as much as you want each year (subject to applicable gift tax). Best of all, relatives and friends can also contribute to the account.
As with the Coverdell education savings plan, 529 contributions grow tax-free, and any money you withdraw for qualified education expenses is non-taxable. 529 account funds can be used to pay for much more than tuition at a traditional college:
- K–12 Tuition – Up to $10,000 per year, per child at public or private schools.
- Trade Schools and Apprenticeship Programs – As long as the school or program is on the Federal Student Aid list.
- Technology, Books, and Fees – Most necessary education-related items, even internet access.
- Study Abroad – Room and board, tuition, fees, and books at eligible foreign schools.
- Student Loan Payments – Up to $10,000 for the account beneficiary or the beneficiary’s siblings.
Most recently, a new law allows excess 529 funds to be rolled over into a Roth IRA for the beneficiary, TAX-FREE. So, in addition to saving for your child’s college education, you may be starting their retirement savings as well.