HELP! Do I Want a 529 Plan or a Coverdell ESA for My College Savings?

529 plans and Coverdell ESAs (Education Savings Accounts) are terrific savings vehicles introduced by the U.S. federal government to help families save for educational expenses.  They both provide tax-advantaged ways for loved ones to prepare for school outlays for their students but do so in vastly different ways that we’ll explore here.

Prior to the Tax Cuts and Jobs Act which became effective January 1, 2018, the only tax-preferential way to save for K-12 tuition and mandatory fees was through a Coverdell account.  With the advent of the tax law, 529 plans can now be used to pay up to $ 10,000 per year per student of these costs.  In some instances, Coverdell accounts still win out, though, as they have no withdrawal limitations for annual K-12 tuition and fee costs.

Coverdells also afford adult account holders more flexibility in the venues in which they can open their accounts and the savings vehicles that they make available.  529 plans are tied to a particular state and can be sponsored “in-house” by either that state or a mutual fund company.  Their offerings are exclusively mutual-fund type investments or similar exchange-traded funds (ETFs).  Offerings vary by state, investment choices and whether or not the plan is purchased directly by the account holder or sold through a financial advisor.  Coverdells offer more options.  Account owners can enroll in a Coverdell savings plan at their bank, their credit union, directly at a brokerage firm or with the aid of a financial advisor.  As with 529 plans, mutual fund and ETFs are available options, but one can also invest in certificates of deposit (CDs), individual stocks or bonds or real estate investment trusts (REITs).  A word to the wise: individual stocks and bonds along with REITS are generally riskier than most mutual funds and ETFs, so the assistance of a financial professional might make some sense if a Coverdell ESA sounds like it makes sense for your family.

Meant to specifically aid lower- and middle-income families, income and contribution limitations for Coverdells come into play in a way that doesn’t exist for 529 plans.  Anyone at any income level can contribute to a student’s 529 plan.  When it comes to Coverdells in 2021, if a single taxpayer makes more than $ 110,000 or a joint couple makes over $ 220,000, they are unable to make a contribution for that year.  That’s the overarching limitation, but if more than one adult or set of adults make occasional contributions, the high-income earner will lose their contribution ability for the year, but a lower- earning individual or couple can step in and make the full allowable contribution in that year.  Contributions also look a lot different between the two kinds of plans.  529 plans each have different contribution limitations, but these generally are decreed by the expected total of the beneficiary’s higher education expenses and currently range between $ 235,000 and $ 529,000 according to  Annual exclusion gifts are currently pegged at $ 15,000 for an individual taxpayer to any recipient, so Grandma and Grandpa could theoretically contribute up to $ 30,000 per grandchild in 2021 as part of their estate planning.  Coverdell contributions look a lot different.  For each student, $ 2,000 is the maximum amount that can be contributed per year.  So, if a child has a Coverdell opened by Mom & Dad and another funded by Uncle Bob, neither party can make a contribution that will boost the total over the $ 2,000 limit.  Some families open both a Coverdell and a 529 plan for their child.  An effective strategy would be to have a contributing loved one first fund the Coverdell fully at $ 2,000 and then have other family members fund the 529 plan.  That allows for more flexibility if the family expects to send the child to a private or parochial school for K-12 learning and may need the ability to pull more than the allowed $ 10,000 per year in resources from the 529 plan.

The age of the beneficiary also comes into play when ticking off the differences between Coverdells and 529 plans.  Coverdells are required to be fully funded by the time a beneficiary turns 18.  There is no such age limitation for 529 plans.  In addition, the balance in a Coverdell must be exhausted by the time the given student turns 30 years of age or else the account must be transferred to another qualifying family member or taxes on growth and a 10% penalty will be assessed.  529 plans are not as restrictive.  There are no age limitations on when the funds in the account can be used for educational expenses and the account can even be transferred to a qualifying family member well over 30 years of age so as to not fall prey to the same tax on growth and 10% penalty if the 529 plan is not transferred.  Remember too that there are courses of study like medicine where advanced degrees routinely are pursued after the age of 30 which will preclude the funding provided by a Coverdell.

I am a licensed Certified College Planning Specialist (CCPS) and can help you wade through the options around saving for the students in your life.  Reach out to me today at or call me at 563-949-4705.

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