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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: Can you explain the difference between Coverdell Education Savings Accounts and Section 529 plans?

Answer: Coverdell Education Savings Accounts, sometimes also called Education IRAs, are a reasonable alternative to Section 529 plans.  Here’s a summary of the relative advantages.

• A Coverdell account has more investment choices than a Section 529 plan.

• Covedells can cover more expenses on tax free basis than Section 529 plans, including private elementary and high school costs

Here are the disadvantages of Coverdells.

• The annual contribution limit is $2,000 per child, no matter how many donors there are.  There are no tax code limits on the amount that can be contributed to a Section 529 plan.

• The account beneficiary must be younger than 18 at the time any deposit is made.  Section 529 plans have no such age restriction.

• The account must be used up by the time the beneficiary is 30, or be rolled over for the beneficiary of a sibling younger than 18.  Section 529 plans have no such age restrictions on successor beneficiaries.

• The ability to make contributions is phased out for those with too much adjusted gross income.

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