Coverdell Esa Vs. 529 Plan: Which to Choose? (script)

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Coverdell ESA vs. 529 Plan: Which to choose? (Script)

07/15/2013

QUESTION:
Coverdell ESA vs. 529 Plan: Which to choose?

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ANSWER:
The Coverdell ESA and the 529 plan are both excellent college savings vehicles because they are both tax-free when used for college. But many families face a choice: do they use a 529 plan for all of their child's college savings, or do they use a Coverdell for the maximum amount of $2,000 each year and put any any extra savings above $2,000 into a 529 plan? In spite of its low annual contribution cap, Coverdell's are now attracting quite a few families. There are two major reasons for that. One is that only the Coverdell allows you to self-direct your investments, just like you might self-direct the investments in your IRA. The other is that Coverdells can be withdrawn tax-free for K-12 and college expenses while 529 plans are limited to college expenses. This feature is appreciated most in families planning to send their children to private grade schools which can cost a lot. A 529 plan, on the other hand, does not impose annual contribution limits, or age limits, or income limits like the Coverdell does and so overall we see a lot more money going into 529 plans than into Coverdells. Plus many savers are happy with the investment choices offered by the 529 plans and don't necessarily want to self-direct their investments. And donít forget this: your state may be giving you a state tax deduction for using a 529 plan, but there are no states offering a state tax deduction for investing with a Coverdell ESA.

Learn more about Coverdell ESAs.

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