Financial Tools & Resources

Coverdell Education Savings Account vs. 529

There are a number of ways to save money for your child's education. Two of the more popular options are a Coverdell Education Savings Account (ESA) and a state-sponsored college savings plan commonly referred to as 529 plans. Below are some of the basic similarities and differences between the options.

Similarities

  • You control how assets are invested.
  • Contributions are non-tax deductible for federal income tax purposes.
  • Earnings grow tax deferred.
  • Funds may be withdrawn free of federal income tax if used for qualified education expenses.
  • Assets can be transferred to another family member if the intended beneficiary doesn't attend college or doesn't use all of the assets.
  • Assets held may also affect your child's access to financial aid.

Differences

Coverdell ESA

  • Has a contribution limit of $2,000 per year for each child.
  • Has Adjusted Gross Income (AGI) phase-out levels for eligible contributors of $190,000 to $220,000 for married taxpayers filing joint returns.
  • If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days.
  • Assets may be withdrawn for qualified elementary and secondary education expenses. That includes tuition to public or private schools, kindergarten through 12th grade, as well as computers and educational software.

State 529 Plan

  • Has contribution limits which are 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 up to $14,000 or a lump sum of $70,000 in the first year of a five-year period to avoid gift-tax consequences. Married couples may contribute up to $28,000 per year or $140,000 in a lump sum for that first year contribution.
  • There is no age limit on using 529 plan assets
  • The 529 plan assets may only be used for eligible expenses at accredited public or private colleges and universities.
  • Investors can invest in any state's plan to find a portfolio that most closely fits their objectives.
  • The state offering a 529 plan has portfolios administered by investment companies, and assets may only be invested in the portfolios offered by the state-sponsored plan in which you participate.
  • Investors can change portfolios once per calendar year or after a change of the primary beneficiary.

Take some time to explore both possibilities with your neighborhood State Farm® agent who can guide you through the each plan's details and help you save for your family's future education needs.

Get the answers you're looking for. Call, click or stop by your registered State Farm agent's office today or speak with a Securities Products representative by calling 800-447-4930.

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