Coverdell education savings accounts provide more flexibility in investment choices, allowing investors to invest in individual stocks. Coverdell education savings accounts are best for families who are saving for pay for a private elementary and secondary school education. But, the low annual contribution limits and shorter time horizon mean that families cannot save as much money as they can for college.
By Mark Kantrowitz August 20, Recommended Articles. Related Articles College Savings Month Top 10 Direct-Sold Plans Unlock Printing Already have an account? In addition, one benefit that both types of plans have over the Coverdell ESA is that some states allow contributions to a plan to be tax-deductible on the state level.
This is a massive difference if you want to plan ahead for years of undergraduate and graduate school education for your child. Also, there is no income threshold for either prepaid or portfolio-based plans, so if you are within the income limits of a Coverdell ESA but would like to save even more, it is best to open a portfolio or prepaid plan. Another concern is when, if ever, the beneficiary can directly access the account. You cannot contribute to a Coverdell ESA if the student is over 18 years old, and beneficiaries cannot be switched in the event college no longer becomes an option.
The student then has to use all the funds by the time they turn 30 or incur a penalty. In fact, they may actually advantage the account owner to receive tax breaks when that time of year rolls around. A prepaid tuition plan is fairly self-explanatory; it allows the account owner and beneficiary to pay for qualified expenses at participating institutions, at their current prices, without being concerned about inflation and subsequent tuition increases.
Unlike Coverdell ESAs, Prepaid Tuition Plans are primarily sponsored by state governments and are generally contingent on the beneficiary attending a local institution in-state.
While one plan is not inherently better than the other, one may be more suited to your needs. To better evaluate which Plan is best for you, you may find this guide by the Securities and Exchange Commission helpful. How exactly do both plans stack up to a Coverdell ESA? A plan is not subject to the age limits of a Coverdell ESA.
However, asset reallocation to another account is limited to two transfers per year, and investments must generally be limited to bonds, mutual funds, and bank products offered by the local financial institution providing the plan.
With a Coverdell ESA, the owner can change the beneficiary if they choose not to use the assets for college when they reach adulthood.
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