The difference between an ESA and a 529 College Savings Plan

3 Mar

If you have just had a child, it is never too early to think about their future. Sending a child to college is a huge expense and many parents cannot finance the costs of their children. Besides, it doesn’t make you a bad parent if you don’t pick up the tab for your child’s expenses. However, if you plan early, you can help change your family tree by helping your child not be at fault early in life. The two most popular college savings accounts are the Coverdell Educational Savings Account (ESA) and the 529 college savings plan. Both savings plans work just like a Health Savings Account or a retirement account because they are invested in investments such as mutual funds and withdrawals must be used for a specific purpose or at a specific time in someone’s life. I give you the pros and cons for each savings plan and you can decide which plan suits you best.

Educational savings plan

Pros:

  • The invested funds are tax-free. You do not have to pay tax on the interest earned.
  • It has a broad definition for “qualified expenditure”. In addition to tuition, room and board, it covers items such as books, computers and internet access.
  • the money can be used from the moment the child is in kindergarten. This is great for someone who wants to use the funds for private primary and secondary education.
  • Contributions are used with dollars after tax, but the benefits are tax free as long as they are used for qualified education costs.

cons:

    • You must earn less than $ 220,000 per year for each married couple to be able to contribute to an ESA
    • With an ESA you can contribute up to $ 2,000 a year
    • Contributions are not tax deductible
    • Beneficiary must be less than 30 years old
    • In some states, the assets of the ESA become the property of the beneficiary

529 Plan

Pros:

    • The limit for contributions is much higher and allows you to save more aggressively
    • No age limit for the beneficiary
    • Account control always remains with the contributor
    • Some states allow 529 retirement benefits that must be deducted from state taxes
    • Anyone with a salary can open a 529 plan and contribute

cons:

    • Qualified expenses are limited to tuition fees, class room, board and books
    • The distributions can only be used for post-secondary education
    • You are trapped in the investments chosen by the plan manager

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Who should open an ESA ?

Who should open an ESA ?

If you think about sending your child to a private school and you want more flexibility with how the money is invested, I think the ESA is your best option. As long as you meet the income requirements, this would be the way to go. Moreover, you can use the money for expensive items such as books, computers, graphing calculators and other expensive items that college needs.

Who needs to open a 529 subscription?

If you start saving for your child’s school expenses later in their lives, then you should definitely open a 529 plan. You can invest aggressively and make up for the years you’ve missed. Plus, if you live in a state where the contributions are tax deductible for your state taxes, you need to view a 529 plan on an ESA.

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