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College Savings Funds and 529 Plans – Why and Which?

May 29, 2013
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Not sure which college savings plan is right for you?  See also NerdWallet’s Best 529 Savings Plans of 2013.

The perfect investment strategy could help you keep up with your child’s higher costs of higher education. As tuition costs are increasing day by day, there is a valid reason to capitalize and prepare years in advance. An Education Savings Account is an account which will remains under guardian’s custody but the child owns the money.  The account is actually managed by parent or legal guardian.  Earnings within the account grow tax-deferred and are distributed tax-free when they are withdrawn exclusively to pay the child’s education expenses. The account is tax-deferred. Since all the withdrawn money from that account is used to pay the child’s education expenses, they are tax free.

There are two basic types of college savings plans, the Coverdell educational savings account and the 529 savings account. To choose the best you need to the advantages and disadvantages of both and then choose accordingly.

Parents, grandparents and other family members are allowed to contribute in 529 college savings plans. The money earned from this account will be tax-deferred and after it is withdrawn to cover eligible college expenses, no tax will be assessed.

529 college savings plans are now offered by every state and some states offer more than one type. Also they offer some prepaid plans. As there are a huge numbers of colleges all over the country, all states have the reciprocal agreements to allow the user to choose one the colleges. If you moved from one state to another, your child can get the benefit of 529 prepaid plans regardless of what college they attend.

Coverdell education savings account, which is mostly similar to a Roth IRA account, has one of the unique benefits. Parents are allowed to deposit after-tax income into an account to save for college. And the withdrawn is tax-free from the account if it is used for educational expenses.

Unlike 529 plans, Coverdell accounts have the limit of $2,000 per child. The total investment under the child’s name cannot exceed $2000 whether it is established by grandparents or other family members.

Coverdell accounts are held in the child’s name. Therefore, any fund which is not used by for college will not be distributed to your child and also which will not get back to you. This is the total opposite system of 529 plans. In 529 plans, accounts are held under the parent’s name and which is transferrable to other family member.

Both plans are good and have some unique offers. You just have to select on depending what goes better with you. College is expensive and the options available to save for it are many. So, be careful with what you are choosing. The best, and right College Savings Funds can make your child’s future smooth and can bring smile to your face.


Disclaimer: This article is a part of NerdWallet’s series of user perspectives on 529 Plans.  The views and recommendations in this piece are held by the individual contributor and do not necessarily reflect the opinions of NerdWallet as a whole.