USAA 529 Plan and Coverdell ESA

[Anonymous]

Has anyone purchased one? Opinions/thoughts? I want to start one for each of my 2 children (ages 1 and 3). I'm getting information overload with all of the choices out there. We belong to USAA and they have one, so I'm wondering if that would be a good option. I am having a hard time distinguishing differentiating criteria among all of the 529 plans out there. We are also members of Pentagon Federal Credit Union and they have something called a Coverdell Education Savings Account. What is this? Just another tax deferred way of saving?

[Anonymous]

My understanding of the Coverdell is it is another savings account that is akin to an IRA for educational savings. The disadvantage is that the contribution limit is only 2000 a year. The one advantage is that you can use it to pay for private K-12 as well as college. I am curious about people's experiences with these savings vehicles as well--because it seems like the only tax-differed savings vehicle that you can use to save for private high school (however at 2,000 a year, you'd just get a little over a year's worth of tuition, but I suppose every bit counts). I also like the idea of being able to pick investments. However it doesn't seem to be talked about as much on this forum.

[Anonymous]

You should realize that PenFed does not own the Coverdell ESA. Just like the 529, it is a government-approved vehicle for saving for education that has tax benefits. You can invest in various accounts under the ESA umbrella or the 529 umbrella. There are differences.

ESA - you can only invest $2K per year per child. You can use that for private school in addition to college/trade school. You can put that money at almost any bank or mutual fund company. You can buy CDs, mutual funds, etc. You just need to invest it with an ESA designation. All banks and mutual fund firms will know how to do it. This is a good option because you have virtually thousands of choices for investing your money and you manage it yourself. Its cons are that the maximum amount you can invest is quite small. All earnings are tax free as long as you use it for the specified reasons.

529 Plans are mostly offered by the states. And you can invest in any state's plan even if you don't live there. Each state has limited options on what you can invest in - usually some age-based plans that get more conservative as you get older, some stable plans, and some mutual fund plans with different riskiness levels. The advantage of 529 plans are that you can invest virutally any amount in it up to the cost of college. Also, if you invest in your own state's plan, you can usually deduct a certain amount of the contributions from your state income taxes. The disadvantage is that you have less control over the investments; that is there are fewer options. Also, if your state's plan is not good, and you invest in another state's plan then you won't get any extra state tax deduction.

Hope that helps.

[Anonymous]

20:05 here. A good site to compare 529 Plans is savingforcollege.com. Virginia's plans are generally ranked pretty well so may be a good option if you live there as you will get a state tax deduction. Utah's are also rated well.

An ESA is pretty easy to open and can be a good option for your first $2000 per year.