The 529 college savings plan and the Education IRA are both tax-advantaged investment plans designed to provide savings for educational expenses. The Education IRA, renamed the Coverdell Education Savings Account, is an individual account with different contribution and investment options than the 529 plan. However, the Coverdell ESA also has more flexibility in how the money can be spent. Although the particulars of each type of plan differ, the tax advantages of both of the plans make them good saving options.
Contribution Amounts
Contributions to Coverdell ESAs are capped at $2,000 annually per beneficiary. The 529 college savings plans, on the other hand, have much higher limits, currently ranging from $146,000 to $305,000. Limits are set by individual states and represent state estimates as to the cost of seven years of post-secondary education. The median limit for 529 plans is $235,000.
Contribution Limitations
Anyone can make a contribution to either a 529 plan or a Coverdell ESA. Contributions to either type of account are not tax-deductible. The 529 contributions are limited to the annual gift tax exclusion amount, meaning the amount above which a donor would have to pay gift tax. For 2010, this limit is $13,000 per donor. The IRS does allow a one-time contribution of up to five times the annual gift exclusion limit, or $65,000 as of 2010.
Approved Tax-Free Distributions
Both 529 and Coverdell ESA plans allow for tax-free distributions for qualified college expenses, such as required books, tuition and fees, supplies and equipment, and qualified room and board expenses. However, Coverdell funds can also be used for qualified elementary and secondary education expenses, unlike 529 funds.
Investment Options
A Coverdell ESA is essentially an individual retirement account, meaning the account is managed by individual owners and almost any type of investment, such as stocks, bonds and mutual funds, may be purchased. A 529 college savings plan, on the other hand, is typically managed by a mutual fund company, and investment options are limited to mutual funds provided by that company. Additionally, many 529 plans charge upfront or deferred sales charges, whereas investment costs in a Coverdell may be limited to commissions on individual trades, depending on the investments chosen by the account holder.
Account Ownership
If you establish a 529 plan, you can change the beneficiary at any time, and the assets are not considered the property of the beneficiary until distribution. A Coverdell ESA is more akin to a custodial account, meaning the beneficiary of the account cannot be changed, and the named beneficiary takes ownership of the assets he turns 18, regardless of the intentions of the donor.
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