Types of Accounts: Coverdell ESA vs. 529 Plans

• Coverdell ESA:This account has no authorized dealer, thus it can be held with any brokerage firm that offers it. Unlike the higher contribution limits in 529 Plan’s, Coverdell contributions are limited to $2k per year per child until the child turns 18 (subject to income limits). Balances must be disbursed by the time the beneficiary is 30 years old. Although the beneficiary can be changed to a qualified family member as mentioned in my earlier post, the new beneficiary must be below the age of 30. Unlike a 529 Plan however, qualified distributions can be made from a Coverdell for qualified elementary and secondary school expenses.
• 529 Plan: T. Rowe Price is the authorized broker dealer for 529 Plan’s in Maryland (for Virginia it’s American Funds). However you aren’t required to have it with them. You can have it with any brokerage firm of your choosing. There is a benefit, however, if you keep your 529 plan with the authorized dealer. For instance, any distributions made on the gains will be both Federally & State tax free. If the plan was held with anyone else but the authorized dealer for the state, the gains would be subject to a State tax. 529 Plan’s have larger contribution limits. Anyone can contribute up to $13k annually, with a Catch-Up of 5 years. Thus one sole-person can contribute up to $65k ($13k*5) at any one time so long as they haven’t made any contributions into the account for the past 5 years. Furthermore, contributions made to this plan can be tax deductible, depending on the state. Maryland, Virginia, and D.C. residents qualify for this deduction. The maximum amount that can be contributed to a 529 Plan in Maryland is $320k. If the beneficiary doesn’t seek a higher education, or only attends partially, the balance in the plan not used on education will incur a 10% tax penalty on the realized gains in addition to the income tax. However, the plan can be transferred to another beneficiary. Unlike Coverdell’s, there is no age limit for distributions from a 529 Plan. Thus the beneficiary can go to school at any time and still make qualified distributions.

As with most tax-deferred accounts, investments available to both accounts are typically conservative and are limited to Mutual Funds, Bonds, and CD’s, with the exception of individual stocks available in Coverdell’s. Foreign educational institutions can qualify for both plans so long as U.S. students attending that school qualify for federal financial aid. So if the school provides FAFSA for its U.S. students, you can rest assured your distributions will qualify.

That pretty much sums up the similarities and differences between both a Coverdell and a 529 Plan. I hope you have been able to keep up and understand my breakdown. This concludes my introduction to the types of accounts available out there. Now I will begin to discuss more trade related topics. Until next time!