Q:

What is the difference between a Coverdell ESA and a 529 plan?

A:

Quick Answer

The Coverdell ESA plan offers more investment flexibility than the 529 plan, its funds can be used for elementary and secondary school costs in addition to college costs, and it is established irrevocably for the child, states Saving for College. Some states offer tax deductions for the 529 plan.

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Full Answer

The Coverdell ESA plan has an annual maximum of $2,000 per child. It is a self-directed plan providing more investment options and potentially reducing costs, states Saving for College. A bank or other financial institution serves as a custodian for this plan. The funds cannot come back to the contributing parents. Any portion of the funds not spent for qualified education goes to the child when he reaches age 30 subject to tax and a 10 percent penalty on the account growth. When both parents and grandparents contribute to the ESA plan for same child, the total cannot exceed the annual limit of $2,000 without tax consequences.

The ability to contribute to the ESA plan is phased out for high-income parents whereas the 529 plan has no income limit or annual contribution limit. Funds can be transferred from an ESA to a 529 plan for the same child but not in the reverse direction, notes Saving for College.

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