Coverdell Education Savings Account vs. 529: What’s the Difference?
There are many ways to save for future education expenses, two of which include 529 college savings plans and Coverdell Education Savings Accounts. So, how do you know which is a better fit for your child’s future?
What Is a Coverdell Education Savings Account?
A Coverdell Education Savings Account (ESA) is a tax-advantaged savings account for K-12 and college expenses. Earnings can grow tax free, and qualified withdrawals are tax free.
A parent, guardian or other eligible individual can open a Coverdell ESA for a designated beneficiary. It offers investment flexibility, but it has income restrictions, and annual contributions are capped for each beneficiary.
You can use funds for qualified education expenses, like tuition, books, and room and board at any qualified institution. You must use or withdraw the account funds by age 30.
What Is a 529 College Savings Plan?
A 529 college savings plan is a state- or school-sponsored tax-advantaged account designed to help families save for future education expenses. Earnings can grow tax free, and withdrawals are generally tax free when used for qualified education expenses.
This plan often allows larger contributions than other education savings options and is commonly used for long-term college savings.
There are two main types of 529 plans:
- Education savings plans: Save and invest money for future education expenses like tuition, fees, room and board, books and supplies.
- Prepaid tuition plans: Purchase future tuition credits at today's prices to manage the cost of tuition at participating schools.
There’s no age limit as to when you must withdraw funds from the account.
What Are the Differences Between Coverdell ESAs and 529 Plans?
Both Coverdell ESAs and 529 plans offer tax-free growth and tax-free withdrawals when you use funds for qualified school expenses. But each account has features that differ:
Feature | Coverdell ESA | 529 College Savings Plan |
Annual contribution limits | Limited to $2,000 per beneficiary per year | Allows larger contributions, subject to state limits |
Contributor income limits | Income limits apply | N/A |
Investment options | Typically offers a wide range of investment options | Offers a selection of investment choices from the plan |
Education expenses | Can be used for a broad range of qualified K-12 and college education expenses | Commonly used for college expenses and certain K-12 tuition expenses |
Age restrictions | Must use or withdraw funds by age 30 | No age limit for using or keeping funds in the account |
How Do I Choose the Best College Savings Plan?
The best option depends on your education savings goals, financial situation, and the intended use of the money. Consider these factors:
- Higher contribution limits: A 529 plan may be a good fit if you want to save larger amounts for future education expenses.
- Investment flexibility: Think about a Coverdell ESA if you prefer a wider range of investment options.
- Income eligibility: Coverdell ESAs have income limits for contributors, meaning people above certain income levels can't contribute. A 529 plan doesn’t have income limits.
- Account rules: If you want flexibility when you use the funds, 529 plans don't have an age limit for withdrawal.
A college savings plan calculator could help you estimate future education costs and set a savings target. If you're not sure which account is the best fit, a financial expert can help you compare your options.
How Can KeyBank Help Me Save for Education?
Every family's education savings goals are different. Resources available through KeyBank can help you explore education savings options, compare account features, and plan for your child’s future.
Learn more about KeyBank's 529 College Savings Plan and Coverdell Education Savings Account types. If you'd like additional guidance, schedule a Key Financial Wellness Review® with a banker. They’ll chat with you about your financial plans and evaluate available education savings strategies.