Difference Between Coverdell ESA vs 529 Plan

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coverdell esa vs 529

Coverdell ESA and 529 plans are two of the most popular college savings account options. They feature distinct benefits, including tax advantages. 

Although both plans ultimately share the same goal, there are multiple fundamental differences between a Coverdell ESA vs 529 plan. We’re going over the main distinctions between Coverdell ESA vs 529 plans! 

We’ll also help you figure out how to choose the best savings option for your child’s future. Let’s start by looking at a Coverdell ESA, and then we’ll look more closely at 529 plans. 

What is a Coverdell ESA?

A Coverdell education savings account (ESA) is a government-sponsored, tax-advantaged trust account that helps families finance educational expenses for beneficiaries. Family members make contributions to the beneficiary’s Coverdell ESA. 

Those funds are deposited with after-tax dollars into different investment vehicles, such as mutual funds, ETFs, and other forms of investment. A major caveat is a fact that contributions cannot exceed $2,000 in any given year. 

In order to be able to contribute, individuals cannot have a modified adjusted gross income of more than $110,000 as an individual or $220,000 as a couple that files joint tax returns. Contributions to a Coverdell ESA are not tax-deductible.

However, like Roth IRAs, funds deposited into Coverdell ESAs are able to grow tax-free and the money remains tax-free at the time of withdrawal. Beneficiaries won’t have to pay taxes on their withdrawals as long as the funds are used to finance qualifying educational expenses.

Is there an age limit for ESA?

Beneficiaries cannot be older than eighteen years old at the time of establishing a Coverdell ESA under their name. However, some exceptions may be made on a case-by-case basis. 

Does ESA cover room and board?

Yes! ESA funds can be used to pay for room and board as well as college tuition, pre-college education expenses, books, supplies, tutoring, transportation, computers, and even internet access.

Who can withdraw from an ESA?

The beneficiary is the only one who can withdraw funds from a Coverdell ESA. Funds must be fully withdrawn by the time the beneficiary is 30 years old as well. They can also choose to roll over any remaining funds into another eligible beneficiary’s Coverdell ESA. 

How to open an ESA 

Anyone can set up an ESA at a brokerage, mutual fund company, or other financial institution. However, when opening an ESA, keep in mind that the account will be created in the child’s name. 

What is a 529 plan?

A 529 plan is another type of tax-advantaged investment account designed to help families save for their child’s future higher education expenses. 529 plans also work similarly to Roth 401(k)s or Roth IRAs. 

With 529 plans, account owners deposit after-tax contributions into the account. From there, investments are able to grow on a tax-deferred basis, and they can be withdrawn tax-free if the money is used to pay for qualifying education expenses. 

529 plans were originally limited to post-secondary education expenses. However, in recent years, the eligibility was expanded so that the funds in 529 plans are allowed to cover K-12 education and apprenticeship programs as well. 

There are two main types of 529 plans, including prepaid tuition plans and education savings plans. Prepaid tuition plans allow you to lock in tuition at their current rates for a beneficiary who may not be attending college for years to come. Education savings plans allow contributors to invest in a wide array of mutual funds and withdraw those funds tax-free for eligible expenses. 

Comparing a Coverdell ESA vs 529 plan

At first glance, Coverdell ESA and 529 plans seem to have a lot in common. In fact, you’d be forgiven for thinking they were the same thing! But there are very major differences between Coverdell ESA vs 529 plans. Let’s compare them. 

Contribution limits

Contributions to a Coverdell ESA are limited to $2,000 per year, and contributions can’t be made after the beneficiary turns eighteen. There are also income limits imposed on contributors. For example, in order to contribute, individuals cannot bring in more than $110,000 and couples cannot bring in more than $220,000. 

On the other hand, 529 college savings plans don’t have annual contribution limits or age limits. Plus, they don’t impose income restrictions on contributors. As such, 529 plans tend to be more flexible than Coverdell ESAs. 

Student loans

529 plans permit the funds to be used for the purpose of paying down student loans, but Coverdell ESA cannot be used to repay student loans. In fact, funds contributed to 529 plans can be withdrawn tax-free to repay up to $10,000 in student loans per borrower. 


The fees associated with college savings accounts vary depending on the broker or the financial institution you are working with, as these fees will correlate to the companies’ specific policies. However, on average, Coverdell ESAs impose more costly fees than 529 plans.

Eligible expenses

Both Coverdell ESAs and 529 plans allow for tax-free withdrawals as long as funds are put towards eligible education-related expenses. However, Coverdell ESAs have an advantage over 529 plans because they can be used to pay for a slightly wider range of expenses, including tuition, books, supplies, tutoring, room and board, uniforms, and transportation. 

Eligible expenses for 529 plans are limited to room and board, supplies, tuition, meal plans, and computer-related internet costs. If you’re looking to start investing with a low-cost plan that doesn’t have any eligible expense requirements, make sure to consider MoneyLion’s fully-managed investment portfolios. 

With no management expenses and a flat monthly maintenance fee of $1, you can gain access to customized, expert-selected investment portfolios based on your specific financial needs and goals.  

Investment options

Coverdell ESAs offer greater flexibility when it comes to investment options than 529 plans. 529 plans are mostly limited to stock and bond mutual funds. However, Coverdell ESAs allow contributors to invest in individual stocks as well. 

Start saving for the future with MoneyLion

Although Coverdell ESAs vs 529 plans have their differences, there’s nothing stopping you from setting up both accounts and harnessing the unique benefits of each. In fact, diversification is a solid strategy when it comes to investing and saving for the future. 

Creating multiple savings and investment accounts will give you access to a wider variety of benefits. If you’re looking for low-cost, flexible savings options, make sure to consider MoneyLion’s fully-managed investment portfolios as well as MoneyLion’s Safety Net. 

Safety Net is a new feature from MoneyLion. It is designed to help you stay prepared for unexpected future expenses. It comes with amazing perks, like Round Ups that can make it possible for you to invest your spare change with ease. Plus, you’ll have the opportunity to unlock up to $1,000 in 0% APR cash advances.

Learn more about MoneyLion’s Safety Net here.


What is the income limit for an ESA?

Individuals can’t contribute to an ESA if their income is above $110,000 as a single person or $220,000 as a couple that files joint tax returns.

What happens to ESA money if not used?

Beneficiaries have until the age of thirty to use the money in their ESA. Unused funds will be distributed right away and the beneficiary will be taxed on the money they receive. There’s also the option to rollover funds for another eligible family member who is not yet thirty years old.

Is a 529 tax-deductible?

Contributions to 529 plans aren’t tax-deductible. However, withdrawals for eligible expenses can be made without incurring capital gains taxes.

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