Both 529 plans and Coverdell Education Savings Account (ESA) are college saving plans with tax benefits. They can be used to help pay for education costs. However, there are a few important distinctions such as contribution amounts, contribution restrictions, and investment options.
- Contribution amounts. Unlike a 529 plan where a donor can contribute up to the gift tax exemption amount without having to file tax paperwork ($10,000 in 2021 for an individual and $20,000 for a married couple in Illinois), a Coverdell ESA limits the total amount contributed for any one beneficiary to $2,000 per year.
- Contribution restrictions. With a 529 plan, there are no income level restrictions for contributions while a Coverdell ESA, if your adjusted gross income exceeds $110,000 for an individual, or $220,000 for a married couple filing a joint return, you’re not eligible to use a Coverdell at all.
- Investment flexibility. With a Coverdell ESA, you can pick specific investments you like while a 529 plan is limited to the investments that the state-sponsored plan offers.
- Tuition vs Expenses. A 529 plan, when used for elementary and secondary schools only, is limited to tuition, while a Coverdell ESA can pay for elementary or secondary school tuition and expenses as well.
- Tax Benefits. Both 529 savings plans and Coverdell ESAs are after-tax accounts. However, for a 529 plan, many states do offer a current-year state tax deduction for contributions.
