Yesterday, we talked about the 529 Plan for college savings. But there is another option out there that may also be appealing called an ESA or Education Savings Account.
Like the 529, the ESA is a college savings account. There are plenty of similarities but also plenty of differences, so let’s outline a few of those…
- Contribution Limits – With an ESA, you are only allowed to contribute up to $2,000 per year. Most 529 plans do not have contribution limits, but it depends on each state.
- Usage Of Funds – 529 plans can only be used for college expenses, while ESA funds may be used for elementary or secondary education such as private school.
- Investment Options – With an ESA, you can invest in just about anything, so you have more control over your money. A state 529 plan will give you investment options but doesn’t let you choose specifics. Your investment options with an ESA are the same as what they would be if you were investing in an IRA.
- Tax Advantages – The tax advantages of an ESA versus a 529 plan are basically the same. Money withdrawn from either account is tax-free as long as it is used for qualified education expenses.
- Age Restrictions – Funds within an ESA must be used by the time the beneficiary (the student) turns 30. There are no age restrictions for 529 plans.
So obviously there are pros and cons to each plan. If your family wants to make lots of contributions and isn’t interested in the nitty-gritty of how the money is invested, a 529 plan is a good choice. If your family wants to have more control over the investments and is considering using some of the money for secondary education expenses (middle school or high school), then an ESA is a nice fit.
YOUR 2 CENTS – What other questions do you have about ESAs or 529 plans?
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