Which to use first: Coverdell Education IRA or 529

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Laura
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Which to use first: Coverdell Education IRA or 529

Post by Laura »

I have a child who will start university studies in the fall of this year. One year later the other child will start. All high school costs are covered so the K-12 benefit of the Coverdell is not important at this time. I have a Coverdell and 529 for each child and need advice from the experts here on whether it makes sense to use one before the other.

- I am aware of the need to pay $4000 in tuition from my own pocket to qualify for the American Opportunity Credit.
- I am aware of the age 30 limit for Coverdell usage

What else should I be thinking about and planning for as we begin drawing down education accounts over the next few months? Are there differences in what are considered qualified educations costs under one or the other? I couldn't see anything that jumped out but perhaps those with experience have found something to focus on.

What paperwork do I need to make sure my child keeps to allow us to claim qualified education expenses? I know the schools provide form 1098-T but what will not be included on that form that my child will need to help me track?

I appreciate any advice from those who have gone through this in the last few years and thanks in advance.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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ObliviousInvestor
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Re: Which to use first: Coverdell Education IRA or 529

Post by ObliviousInvestor »

Laura wrote:Are there differences in what are considered qualified educations costs under one or the other?
It appears to me that "qualified education expenses" is actually defined in IRC 530 (for Coverdells) by referencing the definition used in section 529 (then adding elementary and secondary education expenses, but you have stated that is not relevant here).

http://www.law.cornell.edu/uscode/text/26/530#b_2
http://www.law.cornell.edu/uscode/text/26/529#e

Disclaimer: Not an expert on 529s or Coverdells, just looking at what I see in the IRC.
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Topic Author
Laura
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Re: Which to use first: Coverdell Education IRA or 529

Post by Laura »

Thanks for the links. I will read through them carefully. Sadly, this is an extremely complicated topic.

Laura
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Peter Foley
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Re: Which to use first: Coverdell Education IRA or 529

Post by Peter Foley »

Laura
The 529 did not exist in time for me to make any use of it for my children. In terms of my grandchildren one thing I like about the 529 is it appears to be possible (and easy?) to change beneficiaries. That would have been helpful for us because our youngest chose a more expensive school and needed more help than the oldest.

I do not know what the rules are for Coverdells, but this is one factor that might be worth exploring.
Code Commit
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Re: Which to use first: Coverdell Education IRA or 529

Post by Code Commit »

You might also want to check if you would need to make unqualified withdrawals (say, because you overfunded college savings, or your child got scholarship). In those cases, you could withdraw from the account with the least amount of gains, thus minimizing taxes and penalties (on smaller gains). Thus, in usual years (where you are paying most of the expenses), you could withdraw first from the account with most gains (i.e. lowest basis).

Just something to consider. But, if you have substantial gains in both types of accounts, then it may not make much difference.
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Laura
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Re: Which to use first: Coverdell Education IRA or 529

Post by Laura »

Thanks for the tax comments. I hadn't considered that in determining where to withdraw first. Scholarships will be involved and we will probably want to do unqualified withdrawals so I am not left with money in these accounts when they are out of school.

Assets can be moved around and I will keep that in mind as we move forward. Two children with two different plans in life. Of course, no plans are set since they haven't even started yet but I will keep that in mind.

Laura
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White Coat Investor
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Re: Which to use first: Coverdell Education IRA or 529

Post by White Coat Investor »

Not a huge difference, but I'd consider spending 529 money first because expenses are usually higher. I pay about 15 or 20 basis points more in my 529 than I would pay in a Vanguard ESA. I prefer the 529 for the state tax break, of course.
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Re: Which to use first: Coverdell Education IRA or 529

Post by HueyLD »

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Mel Lindauer
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Re: Which to use first: Coverdell Education IRA or 529

Post by Mel Lindauer »

The Coverdell covers lots of things besides tuition, Laura. They include such things as books and supplies, room and board, computers and internet access, transportation, tutoring, and finally, contributions to a 529 Plan.
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ABQ4804
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Re: Which to use first: Coverdell Education IRA or 529

Post by ABQ4804 »

I'd consider spending 529 money first because expenses are usually higher
I'm not totally familiar with Coverdell rules, but it may help your decision to compare the flexibility with the 529s, to determine which to spend first (as well as compare the costs as EmergDoc pointed out). We really like the flexibility of the 529s to change the beneficiary, including grandchildren. Likely both your children will go to college, but we have one child (mid-20's) who may never attend, and if this happens, we can direct the 529 funds to a niece, nephew or grandchild, or further our own education. Just something to think about, if there's the potential for "extra" college funds.
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Re: Which to use first: Coverdell Education IRA or 529

Post by gte939h »

Laura,

If scholarships are the reason for not using the 529 funds you may be able to withdrawal the funds without paying the 10% fee (taxes on gains will still apply). Not sure if you were aware of that or not. I'm not as familiar with Coverdell, may be the same but I don't think so.

http://www.savingforcollege.com/questio ... cle_id=137
Topic Author
Laura
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Re: Which to use first: Coverdell Education IRA or 529

Post by Laura »

Thanks for the comments. Paying for college is much more complicated than just transferring money to the school so I appreciate all your suggestions.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
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