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FOR IMMEDIATE RELEASE: July 11, 2005

COVERDELL ACCOUNT OR 529 PLAN: A SIDE-BY-SIDE COMPARISON

Higher education is one of the largest financial expenses facing families today. Parents and family members who are saving for a child’s education should learn all they can about Section 529 College Savings Plans and Coverdell Education Savings Accounts (formerly Education IRAs). While both offer significant tax benefits, they differ in other respects. Here, the New York State Society of CPAs present a comparison that can assist you in making the investment choice that works best for you.

TAX CONSIDERATIONS

While contributions to a Section 529 Plan or a Coverdell Education Savings Account are not federally tax deductible, earnings grow tax free, significantly increasing total returns. Some states offer tax deductions and other benefits for residents who contribute to their home state 529 Plan.

As long as the money is used for qualified educational expenses, withdrawals from both Coverdell Accounts and 529 Plans are free from federal (and often state) income taxes.

CONTRIBUTION LIMITS

Parents, grandparents, relatives, and friends can contribute to a beneficiary’s Coverdell Account or Section 529 Plan. For a Coverdell Account, the maximum annual contribution is $2,000 per beneficiary from all contributors combined, making it difficult to accumulate a sufficient amount of money unless you start early. There are income limits, as well. Contributions to a Coverdell are gradually phased out when the contributor’s modified adjusted gross income is between $95,000 and $110,000 on a single return and between $190,000 and $220,000 for married couples filing jointly.

In contrast, Section 529 Plans allow dramatically higher contributions – in excess of $200,000 in many states – and there are no income eligibility limits.

INVESTMENT CHOICES

Whichever you select, choosing the right investment mix is important for reaching your long-term college savings goal. When it comes to investing, Coverdell Accounts and 529 plans invested through your broker offer greater flexibility, since you direct the investment strategy and can invest your contributions in your choice of stocks, bonds, and mutual funds.

While states are beginning to offer more investment options, investing in a state 529 Plan typically means choosing from one or more investment portfolios offered by the plan you select. You can switch investment tracks or roll your savings over into another state’s plan once a year without penalty.

HOW PROCEEDS CAN BE USED

The money you have invested in a Section 529 Plan can be used for qualified college education costs –- tuition, room and board, books, and transportation –- at any accredited college in the United States. There’s no rush to use the money because, in most states, there is no age limit for applying the funds to qualified educational costs.

If the beneficiary of a 529 Plan decides not to go to college, the invested funds can be transferred to another member of the beneficiary’s immediate family -- including first cousins -- and used for their qualified educational expenses.

Coverdell Accounts offer you more flexibility in how you spend the money. Families can use the money in a Coverdell Account to pay for any level of education, including elementary and secondary school costs, and even academic tutoring and education-related computer expenses.

However, you should be aware that the Coverdell is considered a custodial account, which means that the beneficiary becomes the legal account owner when he or she reaches the age of majority (18 or 21, depending on the state you live in). As account owner, the beneficiary can use the funds in any way he or she chooses, and bear the tax consequences.

Unused funds in a Coverdell Account can be rolled over, without penalty, to other family members under age 30.

IMPACT ON FINANCIAL AID

For purposes of obtaining student financial aid, Coverdell Education Accounts and 529 Plans receive equal treatment in the calculation of federal financial aid eligibility. Both are regarded as assets of the parent, rather than the student.

MAKING A CHOICE

Deciding whether to open a Coverdell Account, a 529 College Plan, or both, is an important one. Consult with a CPA who can review your financial situation and help you determine which savings strategy is best for you.

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GET THE FACTS ABOUT COVERDELL EDUCATION SAVINGS ACCOUNTS AND SECTION 529 SAVINGS PLANS
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When saving for college is a priority, it’s wise to consider all options, including section 529 Plans and Coverdell Education Savings Accounts –- formally education IRAs. Contributions in both types of plans grow tax free and withdrawals are free from federal income taxes as long as the money is used for qualified educational expenses.

Generally, individuals may be able to save more money in Section 529 plans than Coverdell Accounts. That is because the maximum annual contribution to a Coverdell Account is $2,000 per beneficiary from all contributors combined and contributions are gradually phased out when the contributor’s modified adjusted gross income reaches certain limits. Section 529 Plans allow dramatically higher contributions –- in excess of $200,000 in many states –- and there are no income eligibility limits.

However, Coverdell Accounts offer you more flexibility on how you spend the money. Families can use the money in a Coverdell Account to pay for any level of education, including elementary and secondary school costs, and even academic tutoring and education-related computer expenses. More restrictions apply to Section 529 plans.

To determine which plan savings vehicle will help you to meet your goals, contact your CPA.