Important Differences With 529 Plans
- Coverdell ESAs have lower maximum contribution limits. From 2002 to 2012, $2,000 is the maximum contribution per year per child. At the end of 2012, the maximum contribution limit is schedule to be reduced to $500 per year. 529 plans generally have no restrictions on contributions, up to the maximum lifetime contribution.
- Coverdell ESAs can allow almost any investment inside including stocks, bonds, and mutual funds, while 529 plans only allow a choice among a number of state run allocation programs. The rules for investments allowed in ESAs are the same as those for IRAs.
- Balances in a Coverdell ESA must be disbursed on qualified education expenses by the time the beneficiary is 30 years old or given to another family member below the age of 30 in order to avoid taxes and penalties; there is no age limit for 529 plans.
- Coverdell ESAs allow withdrawing the money tax free for qualified elementary and secondary school expenses; 529 plans do not.
- The income level of a donor may affect contributions into a Coverdell ESA, but would not affect contributions to a Section 529 plan.
Read more about this topic: Coverdell Education Savings Account
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