Quick Guide: 529 vs ESA

Key facts

  • Both the 529 college savings plan and the Coverdell education savings account are tax-advantaged ways to save for education.
  • The 529 account has greater flexibility in contribution limits and beneficiary changes.
  • The Coverdell ESA can be used for elementary and secondary education expenses in addition to college expenses.

Two of the most well-known tax-advantaged education savings programs are the 529 college savings plan and the Coverdell education savings account. While both offer tax-free earnings when withdrawals are used for education expenses, there are some differences between the two plans that may affect which one you choose for the students in your life.

529 College Savings Plan Features

The 529 college savings plan was setup through federal IRS regulations, and its primary advantage are its associated tax benefits. Earnings in a 529 account grow tax free and withdrawals, when used for qualified expenses at eligible institutions, are federal income tax-free and state income tax-free for most states. In addition, 34 states and Washington, D.C. offer partial or full tax deductions for contributions to a 529 savings plan. Lastly, the 529 plan’s superfunding feature lets you to take advantage of five years of gift tax exemptions upfront, allowing you to invest more in your account earlier.

Except for restrictions on how funds are used, the rest of the 529 plan is quite flexible. Beneficiaries can be changed up to two times per year, and the maximum total contribution for each beneficiary is quite high – between approximately $200,000 and $400,000 varying state to state. Most importantly, the person who opens the account maintains control of the funds until they are withdrawn, ensuring that college savings are used for their intended purpose.

ESA Account Features

The Coverdell ESA is also known as the “Education IRA”. This program was designed to offer tax advantages for families setting money aside for education expenses by permitting contributions to grow tax-free. As long as withdrawals are used for education-related expenses, no further taxes are assessed when distributions are taken.

ESA funds can be invested in a wide variety of assets, and individuals can contribute up to $2,000 per year in 2016 if income limits are met. In addition, the ESA has a critical feature that the 529 plan does not: ESA funds can be used for elementary and secondary school costs, in addition to higher education. This can be extraordinarily helpful for families who plan on enrolling their children attend private, independent or parochial schools.

529 vs ESA

Lower fees and more investment options are excellent reasons to invest in an ESA, and the ESA is the best solution for families who want to put savings towards K-12 education expenses. Alternatively, the 529 college savings plan makes sense for those that do not meet ESA income limits and those who wish make larger contributions to a tax-advantaged educational savings account.

This table breaks down some of the differences between the two choices to assist with decision-making:

Key Features 529 College Savings Plan Coverdell ESA
Changing Beneficiaries Account owner can change beneficiary up to two times per year Account owner can change beneficiary – subject to restrictions
Account Ownership Account owner Custodian – in some states only until beneficiary reaches the age of majority, then beneficiary
Taxes on Withdrawals No, if used for qualified educational expenses. Some states do not exempt gains on qualified withdrawals from income taxes.* No, if used for qualified educational expenses
Federal Tax on Earnings No No
Annual Contribution Limit None, though gift taxes may apply over $14,000 $2,000 per beneficiary per year
Maximum Contribution Amount Approximately $200,000 to $500,000, depending on the state, across all plans for the same beneficiary None
Income Limits for Participation None $110,000 (single) or $220,000 (married filing jointly)
Eligible Institutions Post-secondary only K-12 and post-secondary
* While most states exempt gains on qualified withdrawals from income tax, Alabama only exempts qualified withdrawals from the Alabama 529 Plan; withdrawals from out-of-state plans are subject to Alabama state income tax. Illinois exempts qualified withdrawals from the Illinois 529 plan and also from some, but not all, out-of-state plans.


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This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.

For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.

Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.