Coverdell Education Savings Account or State 529 Plan

What is appropriate for you?

There are a number of ways to save money for your child's education. Two of the more popular are the Coverdell Education Savings Account (ESA) and state-sponsored college-savings plans commonly referred to as 529 plans. Both have advantages for parents and grandparents to accumulate the needed money for college.

Among those advantages are tax benefits and asset control. Although contributions to either an ESA or a 529 plan are non-tax deductible for federal income tax purposes, earnings on the contributions grow tax deferred. In addition, accumulated funds may be withdrawn free of federal income tax if used for qualified education expenses.¹ As the owner of a 529 plan or the responsible individual of an ESA account, you control the assets and determine how they are invested.

The ESA contribution limit is $2,000 per year and the contribution deadline is the tax filing date for that year, not including extensions. The adjusted gross income (AGI) phase-out levels for eligible contributors is $190,000 to $220,000 for married taxpayers filing joint returns.

529 plans are gaining in popularity because of their tax advantages and contribution limits. You may contribute up to the limit set by the state offering the plan, sometimes as much as $360,000, and there is no income limit for contributors. The Federal government allows yearly contributions from single taxpayers of up to $12,000 or a lump sum of $60,000 in the first year of a 5-year period to avoid gift-tax consequences. Married couples may contribute up to $24,000 per year or $120,000 in a lump sum for that first year contribution.²

ESA and 529 plans also offer the ability to transfer the assets to another member of the family if the intended beneficiary does not attend college or does not use all of the assets. The beneficiary must use or distribute the assets of an ESA prior to becoming 30 years old. Thirty days after the beneficiary turns 30, the assets are deemed distributed and are subject to all taxes and penalties. There is no age limit on the use of 529 plan assets.

In addition to contribution limits and AGI eligibility, the plans also differ in other important ways. Beginning in 2002, assets of an ESA may be withdrawn for qualified elementary and secondary education expenses. That includes tuition to public or private schools, kindergarten through twelfth grade, as well as computers and educational software. Assets of a 529 plan may only be used for eligible expenses at accredited public or private colleges and universities.

The ESA is more flexible in terms of the types of securities and choice of fund companies in which contributions can be invested. If you want to invest in mutual funds, individual stocks or bonds, you may do so with an ESA. Assets of 529 plans may only be invested in the portfolios offered by the state-sponsored plan in which you participate. It is important to note that there is market risk involved when investing in mutual funds, including possible loss of principal.

Each state offering a 529 plan has portfolios administered by investment companies. While there are a variety of options available, you may need to alter your investment strategy to fit their options. Investors are also limited in the number of times they can change portfolios (once every 12 months and after a change of the primary beneficiary).

Investors have the ability to invest in any of a number of state plans in order to find a portfolio that most closely fits their objectives. Proceeds generally do not have to be used to pay educational expenses in the state offering the plan, but some states do offer benefits for investing in your home state’s 529 plan.

Disadvantages associated with an ESA include the previously mentioned limits on eligibility as well as lower contribution limits. Assets held within a 529 plan or an ESA may also affect your child's access to financial aid. Take some time to explore both possibilities and make a choice based on your needs and goals. An education can be a major expense. The sooner you begin saving, the better.

The State Farm College Savings Plan is available by registered representatives of State Farm VP Management Corp., One State Farm Plaza, Bloomington, IL 61710, 1-800-447-4930. Please read carefully the Enrollment Handbook and Participation Agreement and consider the investment objectives, risks, fees and expenses and other information associated with The State Farm College Savings Plan before investing or sending money. State and local tax laws vary. If you or the designated beneficiary are not Nebraska residents, you should consider before investing whether your or the designated beneficiary’s home state offers any state tax or other benefits to its residents for investing in the plan offered by that state.

The State Farm College Savings Plan (the “plan”) is sponsored by the State of Nebraska and administered by the Nebraska State Treasurer. The plan is established in cooperation with State Farm VP Management Corp. ("State Farm"), Invesco Aim Distributors, Inc. and the State of Nebraska, pursuant to which State Farm offers classes of shares in a series of accounts within the Nebraska Educational Savings Plan Trust (the "Trust" and plan issuer) that are managed and distributed by Invesco Aim Capital Management, Inc. ("Invesco AIM") and its affiliates. The Trust offers other accounts that are not affiliated with the plan.

The Nebraska State Treasurer serves as trustee of the plan; Invesco Aim Capital Management, Inc. serves as the investment manager, with the oversight of the Nebraska Investment Council; Invesco Aim Distributors, Inc. serves as the distributor; and Invesco Aim Investment Services, Inc. serves as the servicing agent, Union Bank & Trust Company serves as the program manager.

This limit is set by the Nebraska State Treasurer and is subject to change. Contributions can be made until the value of all accounts in the Nebraska Educational Savings Plan Trust for the beneficiary reaches $360,000 or the total amount of contributions for the beneficiary for all accounts in the Trust reaches $360,000. Accounts in excess of this limit can continue to grow through investment earnings realized by the plan, but no additional contributions can be accepted by the plan when the value of all accounts plus any intended contribution is in excess of the limit.

Invesco AimSM is a service mark of Invesco Aim Management Group, Inc. Invesco Aim Advisors, Inc., Invesco Aim Capital Management, Inc., Invesco Aim Private Asset Management, Inc. and Invesco PowerShares Capital Management LLC are the investment advisors for the products and services represented by Invesco Aim; they each provide investment advisory services to individual and institutional clients and do not sell securities. Invesco Aim Distributors, Inc. is the distributor for the retail mutual funds, exchange-traded funds and U.S. institutional money market funds represented by Invesco Aim. All entities are indirect, wholly owned subsidiaries of Invesco Ltd.

The information presented in this document does not constitute tax advice.  Please consult your tax advisor for specific information about your tax situation, including any state tax consequences of an investment.

The availability of such tax or other benefits may be conditioned on meeting certain requirements.

State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 260 KB) .

Need Assistance? 1-800-447-4930

AP2008/06/0666