I was thinking about family financial planning and wanted to make sure that you were aware of a couple really good college education savings options. This has been a topic in my household as our oldest child has started preschool so now the private school and college planning has unfortunately become a reality. I had to pay some homage to Ohio State with the picture on this post since it relates to college savings.
The old adage says it is never too late or too early to plan for a loved ones’ education. Also, keep in mind that compound interest is a magical thing. The problem is that there are several ways to accomplish this so we will discuss the differences of college savings options Coverdell ESA vs. 529 Plan.
College Savings Options Coverdell ESA vs 529 Plan
There are two main options for college savings. The Coverdell Educational Savings Account (ESA) and the 529 Plan. There are some common links in that both are federally non-deductible, grow tax free, beneficiaries are changeable in case one kid is smarter and gets a scholarship, and are parent owned so you control the account. Below are some key points that compare college savings options Coverdell ESA vs 529 Plan.
- Non-deductible contributions.
- Withdrawn earnings are excluded from income to extent of qualified higher education expenses and qualified K-12 expenses also excluded $2,000 per beneficiary per year combined from all sources.
- Can include Tuition, fees, books, supplies, equipment, special needs; room and board for minimum half-time students; additional categories of K-12 expenses (private school tuition)
- Ability to contribute phases out for incomes between $190,000 and $220,000 (joint filers) or $95,000 and $110,000 (single)
- Freedom to invest in whatever stock/mutual fund you would like and most brokerages can establish an account
- Non-deductible contributions
- Withdrawn earnings are excluded from income to extent of qualified higher education expenses.
- Can include Tuition, fees, books, supplies, equipment, special needs; room and board for minimum half-time students.
- No income restrictions.
- Choose from two types: Savings Plan (functions like 401(k) or IRA) and Prepaid Tuition Plan.
- Some states offer a deduction on their state’s income tax return. Here are some samples.
On the other hand, what if you do these plans and your child gets a full scholarship. Then you can either transfer the account to another beneficiary or withdraw it to buy a beach house. In that case, the earnings will be taxed at your tax rate and also will be subject to a 10% penalty. However, at that point the kid has a full-ride and you have a beach house so what is a 10% penalty!!
What college savings option Coverdell ESA or 529 Plan, do you prefer?