Here's a CPA's article on comparing -
ESA vs. 529 - This should clear up SOME of the "consult with your CPA" and "I'm not sure" type questions. The list is looking better and better!
529 Plans vs. Coverdell Education Savings Accounts: A Comparison
By: Gregory J. Cook, EA, CPA
Providing your child or other family members with a quality education may be one of your top priorities, but it can also be an expensive proposition. For the 2002-2003 school year, the average cost of a college education at a four-year private university was $18,273 and $4,081 at a four-year public university, according to the College Board.
Fortunately, you have various options that allow you to save for a child or loved one’s education on a tax-deferred basis. The 529 plan and the Coverdell Education Savings Account are two of the more popular and potentially beneficial accounts in the marketplace today.
What are these accounts and which one will best serve your personal college-planning needs? Let’s take a look at the risks and benefits of each type of account as well as the differentiating features between the two.
Named for Section 529 of the Internal Revenue Code, a 529 plan is an investment plan operated by a state that is designed to help families save for future college costs. Any U.S. citizen or permanent resident, including parents, grandparents, other family members, and friends (known as "Account Owners") can contribute to a 529 plan on behalf of a designated beneficiary. The Account Owner may designate anyone he or she chooses as the beneficiary, including him or herself.
Contribution limits associated with a 529 plan are not as straightforward as limits on other savings programs. The maximum contribution amount is set by Federal Guidelines and calculated independently by each 529-sponsoring program. They are based on the average costs of seven years tuition and room and board expenses at eligible U.S. educational institutions. The current range falls roughly between $225,000 and above, depending on the plan. To reach that total, a married couple can contribute as much as $110,000 each year ($55,000 for individuals) and, provided no more money is contributed in the ensuing four years, the entire amount qualifies for five years of the gift-tax exclusion. While contributions are typically non-deductible, there may be state deductions depending on residency and some other factors. However, earnings do accumulate tax-deferred for as long as they remain in the account.
Withdrawals from a 529 plan are free from federal income taxes if made for qualified higher education expenses, including tuition, fees, books, supplies, room and board, transportation, and other services in connection with the enrollment or attendance of the student at a public or private college or university. Withdrawals may be used to pay these expenses at any accredited post-secondary school in the United States. If withdrawals are made for other expenses, earnings are typically subject to a 10% penalty and ordinary income taxes.
Earnings in a 529 Plan grow free from federal income tax. The law exempting qualified withdrawals from federal income tax expires on December 31, 2010, unless extended by the U.S. Congress. Investing in a 529 plan does come with some risk. There is the risk, as with most college savings plan investment options, that you may lose money, and your account value may fluctuate with market conditions or it may not grow enough to pay for college. Consequently, there is no guarantee that the money in the plan will be sufficient to cover the higher education expenses of the beneficiary.
The Account Owner may change the beneficiary of a 529 plan at any time and for any reason. However, contributed amounts to the 529 plan transferred from a Uniform Gifts to Minors Act (UGMA) account or a Uniform Transfer to Minors Act (UTMA) account may not be redirected.
Coverdell Education Savings Accounts
The Coverdell Education Savings Account (ESA) (formerly the Education IRA) is another valuable way to help meet the high cost of a college education. Any U.S. citizen or permanent resident, including parents, grandparents, other family members and friends can contribute to a Coverdell ESA on behalf of a designated beneficiary. Corporations and other entities, including tax-exempt organizations, may also make contributions.
A Coverdell ESA may be established for any child under the age of 18. You can establish an account for an individual over 18 if the IRS deems him or her to have "special needs." You can transfer assets to a Coverdell ESA from one beneficiary to another if the original owner does not deplete the assets.
You can contribute up to $2,000 annually to a Coverdell ESA. The current income cap for contributing individuals is as follows: $110,000 Adjusted Gross Income (AGI) for single filers and $220,000 AGI for married filing jointly. The taxpayer with an AGI above these amounts is not eligible to contribute. All contributions to a Coverdell ESA are non-deductible, although earnings accumulate tax deferred until withdrawn.
Withdrawals from a Coverdell ESA may be made federal income tax and penalty-free for qualified education expenses including tuition, fees, books, supplies, room and board, transportation, and other services in connection with the enrollment or attendance of the student at a public or private college or university.
Withdrawals may also be used to pay these expenses at any accredited elementary, secondary, or post-secondary school in the United States. While withdrawals can be made for other expenses, earnings are typically subject to a 10% penalty and ordinary income taxes.
As you can see, 529 plans and Coverdell Education Savings Accounts provide significant education savings opportunities for many investors. But to take full advantage of these accounts, you would be best served by consulting with a qualified financial professional. He or she will take the time to discuss the risks and benefits of these two types of accounts in greater detail with you, and help you devise a investment strategy that is most appropriate for your educational planning needs.