Coverdell ESA vs 529 Plans
Must be a valid email address.
Password must be 8-64 characters.
Must be a valid phone number.
Recession incoming? Here’s how you can prepare.
Daily Capital
Home>Daily Capital>Guides>Coverdell ESA vs 529 Plan

Coverdell ESA vs 529 Plan

It’s easy to get caught in the complex web of savings plans and strategies when you’re planning on financing your children’s college educations. What’s more, each family has their own set of financial priorities, unique circumstances and trade-offs to consider. To help simplify the process, we’ve compared the two most well-known, tax-advantaged education savings vehicles: the 529 plan and the Coverdell Educations Savings Account.

While both offer tax-free earnings when withdrawals are used toward education-related expenses, each plan differs in a few ways that may sway your decision when it comes to choosing which is best for you and your family.

529 Plans Features

One of the most common savings vehicles is the state-sponsored college savings plan: the 529. This type of plan’s primary advantages are associated with the contribution limits. There is no limit on annual contributions; however, there are lifetime limits which are usually between $200,000 and $400,000 (varies state to state). If you choose to take advantage of the frontloading feature of the 529, you can contribute up to five years of the annual gift exemption into your children’s 529s without any gift tax issues. Though, be wary when “superfunding” this plan; in some rare cases, meticulous savers have more than they need.

[Three Options for Excess 529 Funds]

A 529 plan’s investment gains grow and can be withdrawn tax-free, and the withdrawals are federal and state income tax-free for most states (as long as both are used for qualifying expenses). For states that don’t offer tax-free benefits, 34 states (including Washington, D.C.) offer partial or full tax deductions on 529 contributions. Aside from the restrictions on how the funds are allocated, the 529 plan itself is pretty flexible and you can change the beneficiary twice a year.

Coverdell Educational Savings

A Coverdell Education Savings Account (ESA) is a trust or custodial account whose sole purpose is to pay for qualified education expenses for beneficiaries under the age of 18 (or special-needs beneficiaries). Once the beneficiary hits 18, you cannot continue contributing to the account. While there is no limit on the number of accounts your child may have, there are limits to total contributions. A Coverdell ESA maximum contribution limit is $2,000/year, but Coverdell ESA’s may be used for private K-12 education expenses or qualifying college expenses (tuition and fees, books, supplies, equipment, room and board). Most traditional mutual funds, exchange traded funds, stocks, bonds or CDs may be used inside of a Coverdell ESA.

Coverdell ESAs enjoy tax benefits similar to a Roth IRA. Money grows tax-deferred and may be removed tax-free for qualifying expenses, although contributions themselves aren’t deductible. According to the IRS, if an account’s distributions aren’t more than your child’s qualified education expenses at an eligible educational institution (in one year), then your child won’t owe tax on the distributions.

Our Takeaway

With lower fees and more investment options, the Coverdell ESA might be more attractive for families looking to invest in a plan who want to save for K-12 education expenses. However, with the income limits and a use-it-or-lose-it rule on an ESA, the 529 plan might fit better for those who want to make larger contributions with more tax-advantages and guarantee the funds be used for college-related expenses. As always, save for your retirement first and then strategize your children’s savings thereafter. Speak with an advisor on which plan fits best with your unique financial situation.

Download the free Personal Capital Education Planning Guide

Personal Capital Education Planning Guide Series

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Jacob has nearly 10 years experience in the financial services industry and is a Certified Financial Planner®. Prior to working at Personal Capital, Jacob held roles with both a community bank as well as a private trust bank assisting high net worth clients with their banking, lending and investment management needs.
Icon Close

To learn what personal information Personal Capital collects, please see our privacy policy for details.

Let us know…

This year, my top financial priority is:

Building my emergency fund
Paying off high-interest debt
Budgeting better
Saving for a short-term goal, like a vacation or new car
Increasing my investment contributions
Maintaining status quo - I’ve got this under control

Make moves toward your money goals with Personal Capital’s free financial tools.