What should I know before investing in the Coverdell College Savings Plan or the 529?
- 2 minutes of estimated read.
- in: Student Loans
- Written by: Charlotte Harper
What is Coverdell college savings plan?
Coverdell Education Savings Accounts (also known as Coverdell ESAs) are investment accounts that allow you to save money for a child’s education. The money in the account grows tax-free and can be used for qualified educational expenses, such as tuition, books, and room and board. Contributions to a Coverdell ESA are not tax-deductible, but any earnings are tax-free when used for qualified educational expenses.
What is investing in 529 plans?
A 529 plan is an investment plan sponsored by a state or educational institution designed to help families save for college. 529 plans are funded with after-tax dollars and offer tax advantages, such as tax-deferred growth and tax-free withdrawals for qualified higher education expenses. 529 plans can be used to pay for tuition, fees, books, supplies and certain room and board expenses at eligible colleges and universities nationwide.
What different between Coverdell college savings and 529?
Coverdell College Savings Plans and 529 plans are both tax-advantaged college savings plans. However, they have some major differences.
Coverdell ESAs are limited to an annual contribution of $2,000, compared to 529 plans which have limits of $15,000 per year. Coverdell contributions must be made in cash, while 529 plans can also allow contributions in securities. Coverdell ESAs can be used for elementary and secondary education expenses, while 529 plans are only for post-secondary education. Coverdell ESAs are also subject to income limits and have more restrictions on investment options.
What should I know before investing in the Coverdell College Savings Plan or the 529?
- Understand the Contribution Limits: Each plan has its own contribution limits, and it is important to understand them before investing. For example, 529 plans have a maximum contribution limit of $15,000 per beneficiary per year. Coverdell Education Savings Accounts have a maximum contribution limit of $2,000 per year.
- Understand the Tax Benefits: 529 plans offer tax-free growth and tax-free withdrawals when used for qualified education expenses. Coverdell Education Savings Accounts offer tax-free growth and withdrawals provided that the funds are used for qualified educational expenses.
- Understand the Investment Options: Each plan offers different investment options. It is important to understand the type of investments available and the fees associated with them.
- Understand the Contribution Rules: Each plan has its own rules regarding how and when contributions can be made. It is important to understand these rules before investing.
- Understand the Fees: Both plans may have fees associated with them. It is important to understand these fees before investing.