Education Financing

Educational savings accounts vs. 529 plans

Saving money for your child's education is one of the best ways you can ensure they'll have a prosperous future. There are many savings options out there, so it is important to research each of them carefully before committing to one. Coverdell Education Savings Accounts (ESAs) and 529 plans are two options.

One factor to consider when choosing between these two accounts is how much you want to contribute to the account each year. With an ESA, no more than $2,000 can be contributed to the account in a year, regardless of how many accounts are open for your child. The limit for a 529 plan is a lot higher. Depending on what state you live in, the limits can vary between $100,000 and $365,000.

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Another point to consider is what you want the savings to be used for. 529 plans can only be put towards college expenses. ESAs, on the other hand, can be used for elementary, secondary or college costs. Money from 529 accounts can only be used for items such as room and board, tuition and books, while ESAs allow for a lot more flexibility. Funds from these accounts can be used for all the previously mentioned costs, as well as computers and Internet access.

You should also think about the age of your child. With ESAs, your child must be under 18 when the account is set up. The account must also be paid out by 30 days after your child turns 30. With the 529 account, there is no such age limit for when the funds must be paid out.

Another factor you must look into is your income. Individuals contributing to an ESA must make less than $110,000 a year. Couples must make less than $220,000. Parental income does not play a part in 529 accounts. While funds put into an ESA are not tax deductible, in some cases money put into 529 accounts can be deducted on state taxes. There are many stipulations regarding taxation, so carefully research the pros and cons of each type of account.

Researching savings accounts can be complicated and time consuming. However, all of the effort is worth it. Making the right financial decisions will ensure your child is starting off on the right foot.