What is the difference between a 529 account and a Coverdell account, also known as the Education IRA?

November 05, 2014

One big difference is what you can invest the money in. Money in the Education IRA can be invested in almost anything such as stocks, bonds and other investment vehicles. The owner of the account, along with your financial advisor, decides where the money is invested. Whereas, the 529 plan cannot be invested in individual stocks or CD’s. The 529 plan is with one company and that company gives you a handful of investment choices to choose from.

With a 529 plan, you can withdraw the money tax-free and use it on most higher education expenses. With the Education IRA, the child doesn’t have to pay taxes on the interest the account earns either, but the money needs to be used for higher education.

In the Education IRA you can contribute $2,000 per year until the child is 18 years old; most 529 plans allow you to put away up to a few hundred thousand in a year and has no age limit. In the Education IRA the money has to be used for education expenses by the time the beneficiary is 30 year old ; whereas there are no age restrictions with the 529 plan. Talk to your financial advisor to see which one will work best for your family or call us at 763-231-9510 and we can help.

To make things even more confusing, check with your financial advisor if your child has a job to see if they qualify for the Roth IRA. The Roth IRA can be taken out tax-free for their first home purchase, college or leave it in for their own retirement.

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