529 Plan and College Savings

Archive for September, 2008

Question: which is better? a 529 Plan or a Coverdell ESA?

I’ve got a 7 year old and a 16 month old and have some money to invest to get one of these going. I’m leaning towards the 529 plans…..any other viewpoints out there?

Answer: The 529 Plan can only be used for college expenses. The Coverdell can be used for any expenses at any educational level, so private schooling for primary education is an eligible expense.

The 529 Plan has much more liberal contribution limits ($12,000 a year right now). The Coverdell‘s $2,000 limit doesn’t build up the savings as quickly. But, the money can be used for a greater number of expenses.

Please note that you can retrieve the money in the 529 Plan for your own use, although you’d have to pay income taxes and a 10% penalty. Money in a Coverdell that isn’t used for educational expenses ultimately belongs to the child.

Be sure to check out the expenses associated with each type of account. There are lots of 529 Plans and Coverdells with needlessly high expenses.