Coverdell Education Savings Account

[VisionaryMom]

Anyone have one? We really don't have savings for DC for college yet, but I'm determined to start this year. I like them better than a 529 because they don't have the limit of the kids needing to go to school in our state. OTOH, the contribution limit is $2,000 a year assuming we stay below the income limits on contributions, and I definitely don't think that's going to be enough to cover college. Thoughts? What are you doing?

[sunflower.mama]

Don't know much about the Coverdell but I can tell you that you DO NOT have to stick with your state for school with a 529. No way no how. We live in MA and our 529s are in Utah because they have lowest fees/best returns. It's possible there are some type of savings plans that that applies to but not 529s. 529s are federally created - no federal income tax on gains as long as used for edu, and don't discriminate by state. States can each have their own plans, and some states offer state income tax deductability of contributions, others don't. So there is some variety as to how the plans are administered, but I have never heard of any state limiting you as to where you can attend college. That wouldn't make sense since the plan is federally authorized. IF your state somehow was the only state with that strange requirement (and I doubt it) you could always open up a plan in another state.

[Jadzia]

Yes, like the previous poster stated you do NOT have to attend school in the same state who administers the 529 plan.

I think you are confusing 529's with state pre-paid tuitions plans. Some states offer a plan where you can buy tuition at today's rates and then use them on a state school when your child is college age. I think a lot of states are starting to scale back those plans because they were finding tuition hikes were going up too fast to keep the plans solvent.

[annekevdbroek]

We have a 529 and a coverdell. Agree with PP that 529 isn't a pre-pair tuition plan. I think our 529 is in Iowa or something - some place that was favorable in terms of rates and taxes and such.

[velochic]

As pps have mentioned, it sounds like you're a little confused and perhaps some more research about 529 and Coverdell college savings programs would be prudent.

I think it's also important to point out that at 18, the child gains control of the money in a Coverdell. You may save it for college, but most kids turn 18 before or right at the start of college and since the money will be theirs, they can do whatever the heck they want to with it. I think that is a HUGE negative about Coverdell plans.

The real advantage of the Coverdell (and one I'd only ever use it for) is to help with costs associated with private schooling PRIOR to college. A 529 plan is really the way to go if you want separate college funds. Neither are really "tax-free" because you pay out of your after-tax income, but within your state there may be some tax credit incentives. However, as someone mentioned, there are no taxes on gains as long as it's used for education and no tax liability when you withdraw. And the account can be transferred from sibling to sibling, and even among other relatives.

I encourage you to read up some more before making a decision. You may be pleasantly surprised by how advantageous the 529 plans actually are.

[VisionaryMom]

Originally Posted by Jadzia

I think you are confusing 529's with state pre-paid tuitions plans.

Perhaps I am. I know my ILs lost a good bit because they had plans set up for my DH and his sibs to go to college in Ohio. Only one of them did. They got back what they'd put in but lost all gains on the money. Perhaps some problems, too, were that they needed the money for non-tuition educational expenses. (All of their children had academic scholarships.)

[velochic]

Originally Posted by BrandiRhoades

Perhaps I am. I know my ILs lost a good bit because they had plans set up for my DH and his sibs to go to college in Ohio. Only one of them did. They got back what they'd put in but lost all gains on the money. Perhaps some problems, too, were that they needed the money for non-tuition educational expenses. (All of their children had academic scholarships.)

You can put either Coverdell or 529s in safer or riskier investments. If your ILs lost their money, it's because they didn't diversify properly, took too many risks, didn't understand their investments, etc. It doesn't matter which plan it was under. They are both investment vehicles for funding schooling, but within any investment, you can take risks or play it safe. It sounds like they took risks and didn't win the gamble. But that's about their investment style, not the plan they chose. And whether it's a 529 or a Coverdell, they both have penalties and tax liability for non-qualified withdrawals.