Investing in Education
A 529 Plan or Coverdell Education Savings Account (CESA), also known as Education IRAs, are great tools to build funding for education expenses.
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Request a ConsultationFeatures of a 529 vs. a CESA
Both a 529 Plan and a CESA can be used to pay for education expenses. However, there are some key factors that differentiate the two.
Basics of a 529 Plan
- No income or age restrictions
- Anyone can set up – parents, grandparent or other relative
- Contributions are considered a gift
- Can contribute up to $15,000 per year without filing gift tax
- Limited to state-sponsored plans
- Limited to tuition when used before college
One major advantage of a 529 plan is that you don’t pay taxes on any earnings or withdrawals. And, if the beneficiary decides not to go to college, the account can be transferred to another beneficiary, usually another family member. Consumers should consult with a tax advisor for more information.
Basics of a CESA
- Income restricted: maximum gross income $110,000 for individual or $220,000 for couple
- Anyone can set up–parents, grandparent or other relative
- Contributions limited to $2,000 per year
- Can be used for any school expenses before college: books, tutoring, computers
- Account automatically passes to beneficiary at age 18
Similar to a 529, a CESA is tax-advantaged so you don’t pay taxes on earnings or withdrawals. Unlike a 529 however, a CESA allows you to invest in any assets you want within the account. A 529 is limited to assets approved by the state-sponsored plan. Consumers should consult with a tax advisor for more information.
Education Savings Account FAQ
Do I lose the money if my kid doesn’t attend private school (K-12) or college?
With a 529 Plan, withdrawals before college are limited to tuition only. However, the account can easily be transferred to another beneficiary. With a CESA, any withdrawals for educational expenses are tax-free. However, withdrawals for other purposes are subject to taxes.
Can I transfer money from one child to another?
A 529 can easily be transferred to another child. Similarly, funds in a CESA can be rolled over to other accounts, including a different CESA, often with no penalty.
What is the total I can contribute?
In a 529, you can contribute up to $15,000 per year without having to file a gift tax return with the IRS. For a CESA, you are allowed to contribute $2,000 per year until your child reaches the age of 18. After that, beneficiaries are entitled to any money in the account, whether it’s used for education or not.
What if the beneficiary doesn’t go to college immediately but waits until mid-20s?
For a 529, the account will always stay in your control, even after the beneficiary turns 18. In a CESA, once your child turns 18, they have control of the funds. They can be used for educational expenses until age 30, at which time funds are distributed to them and taxed as income with a 10% penalty.
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