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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

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.
New Jersey has two 529 Plans to select from. The first, NJBEST, is available only to New Jersey residents and sold directly by the state. The second plan, Franklin Templeton 529 College Savings Plan is advisor sold and available to both residents and non-residents.
Here, the New Jersey Society of Certified Public Accountants (NJSCPA) presents 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. However, New Jersey does not allow an income tax deduction to its residents for contributions made to its two 529 Plans.
New Jersey currently excludes any earnings on investments in 529 Plans and Coverdell Accounts from taxable income if distributions are used for qualified education expenses.

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.
Contributions are treated as a gift to the beneficiary of the plan. To avoid any gift-tax consequences, the annual contribution should not exceed $11,000 per beneficiary. A special election, however, allows a contribution to be treated as if made over five years for gift tax and generation-skipping transfer-tax purposes. This means that $55,000 ($110,000 for a joint gift) can be made in a single year to a 529 Plan account for one beneficiary gift-tax free. This assumes no other gifts are made to this beneficiary during that five-year period. Assets contributed to both Coverdell Accounts and 529 Plans are excluded from the estates of the contributor.

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 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, supplies 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.
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. If you don’t have a CPA, you can easily locate one online using the NJSCPA Find-A-CPA service. Just go to www.findacpa.org to locate a highly-qualified professional who is right for you.

For more complete information about the 529 savings plan, including investment objectives, risks, fees and expenses associated with it, please read the issuer's official statement. The issuer's official statement can be obtained from your financial advisor. Please read it carefully before investing.

Qualified withdrawals made after January 1, 2002 are free from federal income tax. The provisions of the Economic Growth and Tax relief Reconciliation Act of 2001 will expire on December 31, 2010. Unless Congress takes action, earnings withdrawn from a 529 plan account after 2010 to pay for qualified higher educaiton expenses will be subject to federal income tax.

Please consider before investing, whether your home state offers any state tax or other benefits that are only available for investments in your state's qualified tuition program. Other benefits may include reduced or waived program fees, matching grants, and scholarships to state colleges. Additionally, please note that unless Congress takes action, earnings withdrawn from a 529 plan account after 2010 to pay for qualified higher education expenses will be subject to federal income tax.

securities offered through 1st Global Capital Corp., Member FINRA/SIPC
Investment Advisory Services offered through 1st Global Advisors, Inc.


If you would like to receive more information on various financial matters, subscribe to E-CPA, the NJSCPA's free, monthly email newsletter. To subscribe, visit www.njscpa.org/finances or email a subscription request to e-cpa@njscpa.org.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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