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Question:


What is the difference between a Coverdell Education Savings Account and a 529 plan for saving for my college funding goal?
-SoxFan


Answer:


Both vehicles can offer tax advantages to students or their families putting money away to cover a range of education expenses, including tuition, room and board, books and equipment such as computers. A Coverdell account has more financial restrictions than a 529 plan, but Coverdell rules generally are simpler and the potential benefits greater.
 
Coverdell contributions are limited to $2,000 a year, and eligibility is generally limited to individuals with adjusted gross incomes below $110,000, or twice that for joint filers. As with an individual retirement account, a Coverdell must be set up with a bank or other financial institution. There is no tax deduction for contributions, but income and gains accrue tax free.
 
A 529 plan, also called a Qualified Tuition Plan, must be done in conjunction with a specific state or educational institution, so there may be more red tape involved. Contributions can be much greater than for a Coverdell, up to the total cost of the eligible student’s education. Income and gains can also be taken tax free, but the tax break is reduced by the amount of any tax-free grant or scholarship that the student receives.
 
Coverdell accounts are more user-friendly and may be a better choice for someone who meets the income criterion. But it’s not an either/or proposition. There is no restriction on setting up both a Coverdell and a 529 plan, so if your education is going to be pricey enough, you might want to consider one of each.
-Conrad de Aenlle



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