Education IRA is a popular savings plan for all those aspiring to study in future. It provides an appreciable coverage of various education expenses including tuition fees, lodging, supplies cost and any other special costs involved during the course of education.
However, over the last few years many alternative options have developed. One of them is the Education Plan 529 Savings Plan offered by the Education Trust Board of New Mexico. This Plan 529 is available to all US residents. There are some very critical distinguishing features in Plan 529 Savings Account which gives it an edge over the Coverdell Education Savings Plan. Coverdell Education Savings Account (CESA) was formerly known as Education IRA.
The biggest distinguishing point is the limit of contribution. Maximum contributions to an Education IRA plan are $2,000 per year subject to income limits. However, contributions to 529 education plan could be a staggering $300,000 subject to income limits. If you have a plan of doing a post-graduation program at any university, then the expenses, including tuition fees, lodging, supplies, will be a minimum of $50,000. Now compare this to the paltry contribution of $2000 a year allowed in Education IRA. Obvious, you can’t meet all your education expenses with just the Education IRA account.
There are also notable differences when it comes to ownership of the account. The contribution donor has a control of the Education IRA account. However, in case of Plan 529, the account owner has the control on the account. As far as tax on the account earnings is concerned, both the plans have identical treatment. Earnings, for both the account, are tax free. The same applies to the Gift Tax parameter. If you are filing status is Single, then upto $12,000 contribution there is no gift tax. If the filing status is Joint, the limit is $24,000. The above is true for both Education IRA/CESA and Plan 529. However, there is a slight advantage in case of Plan 529. You can make a lump sum contribution of $60,000 (for Single filers) or $120,000 (for Joint filers) which covers five years of contribution. If unfortunately, the account owner dies within the 5 years then the contribution will be apportioned for the remaining term. The same may then be liable to federal and state tax.
You can also change beneficiary in both the plans anytime. The tax implications on the new beneficiary are also same for both the plans. One of the biggest drawbacks of Education IRA plan is the age limit for using the funds accumulated in your account. Education IRA funds can be used for education purpose only till the age of 30. The same limitation is not present in Plan 529.
FDIC Insurance is also an important factor to consider. Education IRA is FDIC insured but Plan 529 is not. Also the plan invests money in mutual funds and hence value can depreciate.
Education is critical to one’s success and hence the account for it. A wise selection can not only make you highly educated but also bring a lifetime happiness.
