What are the differences between a 529 plan and a Coverdell account?

What are the differences between a 529 plan and a Coverdell account?

A 529 plan is a tax-advantaged savings plan designed for education expenses, while a Coverdell account is also tax-advantaged but has lower contribution limits and more flexible use of funds.

Can you explain the tax benefits of each?

Sure! Contributions to a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. Coverdell accounts also offer tax-free growth and withdrawals, but contributions are limited to $2,000 per year.

Which one is better for saving for college?

It depends on your situation. If you want to save a larger amount, a 529 plan might be better due to higher contribution limits. However, if you want more flexibility in how you use the funds, a Coverdell account could be a good choice.

Are there any penalties for withdrawing money early?

Yes, both accounts have penalties for non-qualified withdrawals. For a 529 plan, you may face taxes and a 10% penalty on earnings, while Coverdell accounts also incur taxes and penalties on non-qualified expenses.