Education Savings Account vs. 529 Plan: Comparing Options for College Savings

As a parent, you want to ensure your child has the brightest future possible, including access to higher education. Unfortunately, attending college or a career school can be expensive, even if your child is lucky enough to get a scholarship. That’s why it’s important to start saving for their college education as early as possible.

But what’s the best way to save? Two popular options are Coverdell Education Savings Accounts (ESA) and 529 plans, such as the NC 529 Plan. While both plans have positive aspects, the 529 is often seen as the better financial option because it offers more advantages to more people. Here’s a closer look at the 529 Plan vs a savings account.

What Is a Coverdell ESA?

The Coverdell ESA used to be called an Education IRA (individual retirement account) because, like an IRA, it allows you to contribute up to a certain amount each year. Currently, that amount is $2,000 per year until your child turns 18.

The money grows tax-free, and you can withdraw it without paying taxes as long as it’s used for qualified education expenses, such as college tuition, fees, books, and other school expenses. Funds from the Coverdell ESA can also be used for K–12 education expenses, like private school tuition, academic tutoring, and computers.

This education savings account isn’t for everyone, though. If your modified annual gross income is over $110,000 ($220,000 if filing jointly), you may not be eligible to open an account. Additionally, if you do open an account and your child doesn’t go to college or doesn’t use all of the money for education expenses by the time they turn 30, the remaining amount will be disbursed to them, and they will be taxed on it.

What Is a 529 Plan?

Named for Section 529 of the Internal Revenue Code, the 529 plan is a tax-advantaged savings and investment program. Unlike the Coverdell ESA, 529 accounts can be used to invest for any future student, regardless of age. That means you can start one for your child, a grandchild, or even yourself. If you decide to change the beneficiary to another family member, you can do so at any time without a penalty.

There’s no cap on yearly contributions, but there is a total maximum contribution over the life of the account, currently $550,000. You can save as little or as much as you want each year (subject to applicable gift tax). Best of all, relatives and friends can also contribute to the account.

As with the Coverdell education savings plan, 529 contributions grow tax-free, and any money you withdraw for qualified education expenses is non-taxable. 529 account funds can be used to pay for much more than tuition at a traditional college:

• K–12 Tuition – Up to $10,000 per year, per child at public or private schools.
• Trade Schools and Apprenticeship Programs – As long as the school or program is on the Federal Student Aid list.
• Technology, Books, and Fees – Most necessary education-related items, even internet access.
• Study Abroad – Room and board, tuition, fees, and books at eligible foreign schools.
• Student Loan Payments – Up to $10,000 for the account beneficiary or the beneficiary’s siblings.

Most recently, a new law allows excess 529 funds to be rolled over into a Roth IRA for the beneficiary, TAX-FREE. So, in addition to saving for your child’s college education, you may be starting their retirement savings as well.

Where Can I Learn More?

Now that you know the advantages of the 529 plan over an education savings plan, you probably have other questions like, “Where do I sign up?” and “How much should I save?” You’ll find answers to those questions and many more on our website. Remember, it’s never too early to start saving for your child’s future. Open an NC 529 Account today!