How are 529 College Savings Plans and Coverdell ESAs similar and different?
Similarities: These education savings plans are similar to each other and both work similar to Roth IRAs - contributions are non-deductible and grow tax free. Other similarities include:
ý Withdrawals are also tax free for qualified higher education expenses.
ý 529 Plans and Coverdell ESAs (Education Savings Account) are viewed the same for financial aid purposes. They are considered the assets of the custodian (the person who opened the account), and withdrawals by the beneficiary are not considered taxable income when used for college expenses.
ý Both plans can be transferred to another beneficiary without penalties or fees.
Differences: The major differences between the 529 Plans and Coverdell ESAs are listed below.
Control of account:
529 Plan: Account holder controls when withdrawals will be made and for what purpose, and can change beneficiaries at will. There are no restrictions regarding when funds must be used.
Coverdell ESA: Account holder can change beneficiary at will. If money is not transferred to a new beneficiary or used for higher education costs, then the beneficiary receives the assets when they turn 30 and the account will be assessed taxes and penalties.
Age limit for contributions and withdrawals:
529 Plan: None.
Coverdell ESA: Must be under 18 to receive contributions, must use assets before age 30.
529 Plan: Between $100,000 and $350,000 depending on state
Coverdell ESA: $2,000 per year from all sources
Income limits for contributors:
529 Plan: No income limit.
Coverdell ESA: To qualify for the max $2,000 contribution, your AGI must be less than $95,000 for single filers and $190,000 for married couples. Contributions will drop to $500 per year in 2010 if Congress does not extend the current limits.
State tax deductions or credits for contributions:
529 Plan: Yes, depending on state plan and residency.
Coverdell ESA: No.
Uses for plan assets:
529 Plan: Higher education only.
Coverdell ESA: Through 2010 assets can be used for K-12 and higher education.
529 Plan: Stocks, bonds, mutual funds, CDs. Can only change investment allocation 2 times per year.
Coverdell ESA: Stocks, bonds, mutual funds, CDs. No limit to changes in investment allocation.
How do I enroll in a Coverdell or 529 Educational Savings Account?
This is the easy part. While some plans restrict enrollment to specific months, most are open year-round. Contact us and we'll get you started.
You open an account with as little as $25 or $50. And you can pay by check or set up monthly contributions through payroll deduction or automatic withdrawal from a designated bank account.
Can I transfer custodial account funds to a 529 plan?
Most 529 plans allow such a transfer, but there are a few special rules. Money you put into the kids' custodial accounts was an irrevocable gift, and moving it to a 529 account doesn't change that fact. The money can never be shifted to another beneficiary, for example, and your children will control it when they reach the age of majority, either 18 or 21, depending on state law. New money put into a separate account in the same 529 plan still can be controlled by the parents and shifted to another beneficiary if the child for whom the account is intended decides not to go to college.
The distinction between custodial-account money shifted to a 529 plan and other contributions is a good reason to separate accounts. College-savings plans accept only cash deposits, so you'll have to sell the stock, mutual funds or other investments from the custodial account -- and pay capital-gains taxes on any profits -- to shift the money.
Who controls the plan?
Each account has an owner -- or joint owners -- and that person controls the assets, regardless of how many people contribute. The owner doesn't have to be a parent.
Can I switch plans?
In the past, this was allowed only when changing the beneficiary of the account. Now you can move money as often as once a year for any reason.
Contact the plan you'd like to switch into to get the forms you'll need to make the transfer. Because many states continue to improve their plans, it's smart to check out the options every year or so.
Can the money be used at a foreign college?
You can use the money at hundreds of foreign colleges, including the University of Toronto, McGill in Montreal and many other Canadian schools. If U.S. students at the school qualify for federal financial aid, you can use 529-plan or ESA money to pay the bills without worrying that you'll lose any of the tax benefits.