529 Plan vs. Educational IRA

[mbw12]

Can anyone please explain the difference between the two of these to me? also, what are the pros and cons of both?

also, what happens with either one if your child winds up getting a scholarship (or worse...such as not going to college?)

Thanks!

 

[Jon99]

I am sure others will help out as I am a little lacking..

We have both for our children, a 529 thru the Illinois Bright Start and ESA's thru Sharebuilders.. The big difference is that the ESA's allow $2000 per year while the 529's have a much larger limit, I believe $15K..

Pro of the ESA is that the investment choices are virtually unlimited such as an IRA while the 529's have a fairly limited choice, though some states offer more..

 

[jeankeri]

For the 529s most states will give you a break on your state tax if you opt for your own state's 529 plan. There is a 529 guru online (his actual 'name'- google it) who has great info on the benefits of 529 plans and why G.W. is trying to phase them out (people who already invest would be grandfathered in and continue to receive the same benefits they do now).

 

[Jon99]

http://www.savingforcollege.com/

 

[georgina]

If the child receives a scholarship, they can withdraw that amount penalty free from the 529. Still have 2 years to go before we try it, but that is what the rules are for now.

 

[jeankeri]

With a 529, you can transfer the $ to another family member if the original designee does not attend college.

 

[JudicialTyranny]

One difference: 529 can only be used for college. Educational IRA (i.e. Coverdell ESA) can be used for elementary and secondary (high school) tuition, if you plan on sending to a private school.

 

[dcfromva]

Can anyone please explain the difference between the two of these to me? also, what are the pros and cons of both?

also, what happens with either one if your child winds up getting a scholarship (or worse...such as not going to college?)

Thanks!

mbw12,
Here are 3 more:
This is a big one: The assets in the ESA belong to the beneficiary. The assets in the 529 belong to the account owner. At the end of the day, if the ESA money is not used for a qualified educational expense, it must be cashed in by age 30 and will belong to the child.
The 529 belongs to the account owner (usually the parent). If the money is not used for college, the parent can change the beneficiary or the account could be cashed in and the proceeds go to the account owner. The 529 has to be used within 10 years after projected graduation or 10 years after the account is opened if already graduated--there are some exceptions for Armed Services Personnel. Also, extensions of the 10 year limit may be requested.

The ESA may not be funded past the age of 18.
There is no age restriction on funding a 529. This is quite handy in that you can continue to fund the 529 after the child starts college. It gives you 3.5 more years to save (assuming that you pay for your expenses in advance and your last tuition payment would be around Jan of your child's senior year). This is also good because you really don't know which college your child will attend until they have been accepted. This could help to avoid paying penalties on earnings on a 529 plan--which could happen if you overfund the account.

There is an income test for contributors to ESAs (if you make too much, you can not contribute to an ESA). There is no income test for contributors to 529 plans.

-DC