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Saving for College: What are My Choices?

May 16, 2016

Coverdell vs 529 -- which is better for you?

There are many different ways to save for your child’s future education expenses. Two popular options are the Coverdell Education Savings Account and the 529 College Savings Plan. To determine which of the two are better for your specific needs, we need to take a look at the benefits and limitations of each option. 


So which is better, the Coverdell or the 529? It depends.

The Coverdell looks appealing if you want to pay for pre-college education expenses. However, the contribution limits are rather low, and could be phased out completely if your income is too high. The 529 has relatively low restrictions, has no income or age limits, and a high contribution limit compared to the Coverdell. You also have the choice to contribute to both in the same year. Depending on your situation, the Coverdell could be more suitable, the 529 might make more sense, or possibly neither. 


Works Cited:
IRS Online Publications

The information presented is for general information only, is not intended to provide specific advice or recommendations for any individual and does not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual's goals, time horizon, and tolerance for risk. NPC does not render tax advice.
An investor should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. More information is available in the issuer's official statement which can be obtained from your financial professional. The official statement should be read carefully before investing. 
Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents and taxpayers. The investments inside a 529 plan may fluctuate with changes in market conditions. When redeemed shares may be worth more or less than their original value. Nonqualified withdrawals do not enjoy tax-favored treatment. The earnings part of a nonqualified withdrawal will be subject to federal income tax, and the tax will typically be assessed at the account owner's rate, not at the beneficiary's rate. Plus, the earnings part of a nonqualified withdrawal will be subject to a 10 percent federal penalty, and possibly a state penalty too.


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