529 College Savings Plan vs. Coverdell Education Savings: What’s the Difference?

What Is a 529 College Savings Plan?

A 529 college savings plan is an investment account designed to encourage saving for future education costs. There are two types of 529 plans, both with tax advantages: an educational savings plan and a prepaid tuition plan. These plans are usually sponsored by state governments, but they can also be offered by educational institutions. The funds in a 529 plan can be used to pay for qualified expenses such as tuition, fees, room and board, books, and supplies for eligible educational institutions. Earnings in a 529 college savings plan grow tax free, and withdrawals are tax free as long as they are used for qualified education expenses. To learn more, visit KeyBank’s 529 College Saving Plan.

What Is a Coverdell Education Savings Account?

A Coverdell Education Savings Account (ESA) is a tax-advantaged investment account that allows families to save money for educational expenses. Earnings in the account grow tax free as long as they are used for qualified education expenses such as tuition, fees, books, supplies, and room and board for kindergarten through 12th grade, as well as for college and other post-secondary education. A Coverdell ESA can be used for expenses at any eligible institution. To learn more, visit KeyBank’s Coverdell Education Savings Account.

What Are the Differences Between 529 Plans and Coverdell ESAs?

529 college savings plans and Coverdell Education Savings Accounts (ESA) are both tax-advantaged investment accounts designed to save for education expenses. However, there are some key differences between them:

1. Contribution Limits: The maximum annual contribution limit for a Coverdell ESA is $2,000 per beneficiary, while there is no annual contribution limit for 529 college savings plans. However, 529 plans have a lifetime contribution limit, which varies by state and can be up to several hundred thousand dollars per beneficiary.
2. Eligible Expenses: Both 529 plans and Coverdell ESAs allow tax-free withdrawals for qualified education expenses, but the definition of qualified expenses differs. Both plans cover expenses like tuition, fees, books, and room and board, but Coverdell ESAs also include K-12 tuition, tutoring, and computers.
3. Income Limits: Coverdell ESAs have income limits for contributors, while 529 plans do not. Individuals earning more than $110,000 per year (or $220,000 if filing jointly) cannot contribute to a Coverdell ESA.
4. Investment Options: 529 plans generally offer a wider range of investment options than Coverdell ESAs.
5. Ownership: 529 plans are owned by the account holder (custodian), while Coverdell ESAs are owned by the beneficiary.

Which Is Right for You?

To determine whether a 529 plan or a Coverdell Education Savings Account (ESA) is the better option, consider these factors:

• If your primary focus is on saving for higher education expenses, the 529 plan might be more suitable for the higher contribution limits and state-sponsored tax advantages, especially if you live in a state offering additional tax benefits.
• If you seek a more versatile education savings option, including potential K-12 expenses, the Coverdell ESA could be preferable.
• Evaluate your income level and determine whether you meet the income eligibility requirements for a Coverdell ESA.

Ultimately, your choice should be based on your financial situation, your children’s educational objectives, and the flexibility and tax benefits each option offers, ensuring the selected plan aligns with your long-term educational savings goals.