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How do Coverdell education savings accounts compare to 529 plans?
Coverdell ESAs are another option you have to help fund your grandchildren’s college expenses. Like 529 plans, ESAs represent a tax-deferred and potentially tax-free way to save for college expenses. And unlike 529 plans, ESA withdrawals are tax-free when used for qualifying K-12 expenses in addition to college. However, for grandparents in particular, ESAs pose some issues not faced with 529 plans.
One concern is that only $2,000 per year can be contributed to ESAs for any child and that contributions from all sources are combined for purposes of this limit. If you were to put $2,000 into your grandchild’s ESA in the same year that her parents, other grandparents, or anyone else makes contributions to her ESA, the annual limit is exceeded and your grandchild must pay a penalty. It may be difficult or impossible for you to know whether other family members are contributing to ESAs. You probably do not want to take on this risk.
Another concern with ESAs is that grandparents do not retain the same degree of control over contributed funds as 529 plans allow. Most ESA agreements require that the child’s parent or guardian be the “responsible individual” on the account, leaving the grandparent out. Even if you were to find an ESA provider (bank, mutual fund, brokerage, etc.) that permits you as grandparent to be the responsible individual, you may not request a refund like you can with a 529 plan. ESA are held as trust or custodial funds for the beneficiary and distributions are reported under the beneficiary’s social security number.
- How can I select the right 529 plan if I don’t know where my grandchildren will be attending college?
- What happens if I have money in a 529 account for a grandchild who later decides to not attend college?
- I would like to put some money towards my grandchildren’s college savings, but I’m worried about unplanned medical expenses or other financial needs I may have later on. Can I get my money back out of a 529 plan?
- Which investment option in the 529 plan should I choose for my grandchild?
- We have 16 grandchildren below college age. Should we set up a separate 529 account for each of them, or can we combine the savings into just one account?
- Instead of opening my own 529 accounts, can I just make contributions to the 529 accounts my children have already established for my grandchildren?
- How do Coverdell education savings accounts compare to 529 plans?
- If I ever need to go to a nursing home and apply for Medicaid benefits, will the 529 accounts I have set up for my grandchildren be counted as part of my assets?
- What happens to my 529 plan if I die or become incapacitated?
- Am I hurting my grandchild’s eligibility for financial aid by putting money into a 529 plan for him?
- My tax adviser is recommending 529 plans as an estate-planning vehicle. What is the advantage?
- I’ve been making direct gifts to my grandchild each year into a custodial account (UTMA) with the understanding that those funds are to be used for college. Is there anything wrong with this approach?
- My estate planner tells me I can reduce my estate by paying my grandchildren’s tuition and not even have to worry about the gift tax. So why should I use 529 plans?