The Coverdell Education Savings Account Is For Primary And Secondary Education Expenses

The Coverdell Education Savings Account (originally called Education IRAs, now known also as an Education Savings Account, Coverdell ESA, or ESA) is designed to encourage parents to save for their children's future college education expenses. This tax-advantaged investment account is part of the Internal Revenue Code.

It bears the name of the late U.S. Senator Paul Coverdell (R-GA), who sponsored the legislation which now gives millions of Americans the opportunity to fund their children's college education.

Differences between the Coverdell Education Savings Account and 529 Plans

There are a few tax differences between the Coverdell Education Savings Account and 529 plans. The Coverdell Education Savings Account allows money to grow tax deferred, just like the 529 plans. Proceeds withdrawn for qualified education expenses are tax free when used at a qualified institution. The 529 plans only cover tuition and fees at a college or university; funds in the Coverdell Education Savings Account may be used for primary and secondary education expenses. Other differences include:

There are lower contribution limits for the Coverdell Education Savings Account. Only $2,000 can be contributed per child, per year. Generally, 529 plans have no contribution limits.

Investment vehicles, including stocks, bonds and mutual funds are allowed for a Coverdell Education Savings Account. The same rules apply as with Individual Retirement Accounts (IRAs). State run allocation programs can only be used for 529 plans.

There is no age limit for disbursing funds with the 529 plans. With the Coverdell Education Savings Account, all monies should be disbursed by the time the beneficiary is 30 years old to avoid taxes and penalties.

The income level of the Coverdell Education Savings Account donor affects the amount of the contributions. Income levels are not a consideration for 529 plans.

Similarities between the Coverdell Education Savings Account and 529 Plans

The beneficiary's amount of financial aid is not reduced by the amount of money in either the 529 plan or the Coverdell ESA because they are not considered part of the beneficiary's assets, but rather the owner of the account. Approximately six percent of a parent's assets are considered for financing a child's college education, while 35% of the child's assets are considered.

A new beneficiary can be designated by the custodian of both the Coverdell Education Savings Account and the 529 plan without taxes or penalties. The new beneficiary must be an eligible family member of the original beneficiary.