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Question for the Money Doctors

Question submitted on Apr 15, 2010.


What is the difference between a 529 and an Education Savings Account? Which is better to start for a two year old? With the new student loan changes, will parents/grand parents need to save as much as before the changes?


Thank you for writing in about education savings alternatives. The one certainty about any law or loan qualifications for education related to a two year old is that the laws and/or loan rules are bound to change. The rule that I prefer to follow is that as much as possible should be saved for education. Rates to attend school have risen, and should continue to rise for many years to come. Budget cuts to education funding and the financial support provided by an institution’s endowment funds has been negatively impacted due to the current financial crisis and should continue placing more pressure on institutions to cut programs and increase tuition for many more years.

With respect to the key distinctions between the 529 plan and the Coverdell plan, the Coverdell allows you to use the funds for pre-college purposes and is limited to making contributions based on the income level of the saver. The rules for use for education in Coverdell plans have been historically a little more flexible.

My personal opinion is that it is difficult to save a meaningful amount for pre-collegiate education in a Coverdell. One advantage, which may be important to the saver, is you have greater investment control over the Coverdell account, whereas with the 529 plan, you have a basket of pre-selected options to select from.

The Coverdell may be a nice complement to 529 plans depending on personal facts and circumstances.

You are not required to select your state’s plan. However, anyone in a state that offers a state income tax deduction for saving in a 529 plan, would be wise to consider their state plan.

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