What Are the Benefits of Converting a Coverdell to a 529 Plan?

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Mark Kantrowitz

By Mark Kantrowitz

August 20, 2020

There are several benefits to converting a Coverdell Education Savings Account (ESA) to a 529 college savings plan. A Coverdell Education Savings Accounts (ESA) is a trust or custodial account designed to help families pay for elementary, secondary and postsecondary education. Just like a 529 savings plan, a Coverdell ESA offers tax-free earnings growth and tax-free withdrawals when the funds are spent on qualified expenses

529 college savings plans have several advantages over a Coverdell Education Savings Account (ESA). But, Coverdell accounts also have a few advantages over 529 plans.

Coverdell Education Savings Accounts Are More Limited than 529 Plans

Limits on contributions. Contributions to a Coverdell education savings account are limited to $2,000 per year and must stop when the beneficiary reaches age 18. Contributions to a Coverdell education savings account phase out when the contributor’s income is $95,000 to $110,000 for single tax filers and $190,000 to $220,000 for married filing jointly. 529 college savings plans, on the other hand, have no annual contribution limits or income restrictions on contributors, other than the gift tax limitations. 

Superfunding. 529 college savings plans allow 5-year gift tax averaging as an option. Coverdell education savings accounts do not. 

Age limits. In addition to the age 18 limit on contributions, Coverdell education savings accounts must be spent by the time the beneficiary reaches age 30 plus 30 days unless the beneficiary is a special needs beneficiary. There are no age limits on 529 plans.

Student loan repayment. 529 plans can be used to repay up to $10,000 per borrower in student loans of the beneficiary and the beneficiary’s siblings. Coverdell education savings accounts cannot be used to repay student loans.

See also: Top 5 Mistakes to Avoid When Using a Coverdell ESA

Coverdell Education Savings Accounts Cost More

Fees. Some Coverdell education savings accounts charge high fees, some charge lower fees. Direct-sold 529 plans have much lower fees.

Taxes. Most state income tax breaks on contributions are limited to 529 plans. However, some states provide a state income tax deduction or tax credit on rollover contributions from a Coverdell education savings account to a 529 plan. 

Coverdell Accounts Have a Few Advantages over 529 Plans

Eligible expenses. Coverdell education savings accounts can be used to pay for many K-12 expenses, such as tuition, books, supplies, tutoring, room and board, uniforms and transportation, while 529 college savings plans are limited to $10,000 per year in K-12 tuition. 

Investment options. Coverdell education savings accounts provide more flexibility in investment choices, allowing investors to invest in individual stocks. 529 plans provide a limited number of stock and bond mutual funds, but also offer age-based asset allocations. 

Bottom Line

Coverdell education savings accounts are best for families who are saving for pay for a private elementary and secondary school education. But, the low annual contribution limits and shorter time horizon mean that families cannot save as much money as they can for college.

A good place to start:

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