College Savings: Coverdell Education Savings Account Vs. 529 Plan

So, your little angel has graduated. The dream has come true. 

They are finally getting the hell out of your house. 

Let’s be real, though. They  aren’t going to last a second out there among the piranhas. You’ll sleep a little easier if you can give them a little leg up. To that end,you may want to start a college savings account.

Planning for college is tricky. Especially where your taxes are concerned. Here’s what you need to know.

There are two types of accounts that you can open to help your child graduate without a crippling amount of debt. 

You can reduce your decision between these account options to two accounts to one question: Do you want control over your investment options or tax-free contributions? 

Coverdell Education Savings Account 

A Coverdell Education Savings Account is set up to cover a child’s secondary education. The growth on your contribution is tax-deferred until the funds are spent. If they are spent on education, they are tax-free.

There is no tax deduction for the amount you contribute to a Coverdell, but you have some fantastic investment options and you can opt to self-direct. The rules are similar to those that cover an IRA.

 Coverdell has the following rules and benefits:

Coverdell Rules

Coverdell Benefits

529 Plan Account

The 529 Plan is invested in a state-managed fund and may be eligible for a state income tax deduction (contributions are tax deductible in 35 states). Money contributed to your 529 Plan account is invested into a state managed fund. A 529 has the following rules and benefits:

529 Rules

529 Benefits

College Savings Account Recap

Planning financially for college can be tricky, especially when it comes to taxes. As you can see, the main difference between the two accounts is that Coverdell accounts have the benefit of allowing you to decide how your contributions will be invested, but the money is not tax deductible.

On the other hand, contributions to a 529 Plan account must go to a state run fund, but that money is usually eligible for tax deductions.