529 v Coverdell v UTM

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529 v Coverdell v UTM

Postby charlestown1978 » Sun Feb 10, 2013 9:59 am

I see a lot of discussion on which retirement accounts to fund first, but cannot find any discussion on which college/education saving account to fund first.

Assuming that you get NO state deduction for contributions to a 529 plan and you have already MAXED out your retirement accounts, does anyone have any opinions on which should be funded first? For example, fund a Coverdell ESA to the max ($2k) and then a 529?

If your child (children) are young, I am thinking in this case (no state deduction for 529 and retirement accounts maxed out) that you should fund a Coverdell first because it provides more flexibility on use (if you expect to pay for private school or other educational expenses (e.g., tutors) in addition to public school).

I believe I understand the rational behind the order of which retirement accounts to fund first, but I am struggling with which college/educational savings account to fund first and am approaching analysis paralysis.

One thing I keep coming back to is that all this analysis of what will happen in the near-term (private school/tutors) may be for nothing because the gains on a Coverdell maybe so small that the tax benefit is minimal. Though, every little bit helps and I am not building savings by ignoring the small costs.

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Re: 529 v Coverdell v UTM

Postby Toons » Sun Feb 10, 2013 10:09 am

"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: 529 v Coverdell v UTM

Postby mhc » Sun Feb 10, 2013 10:09 am

With no state tax deduction, I would do a Coverdell first. The Coverdell can be lower cost than a 529 and provide more investment choices and provide more withdrawal flexibility.

If you max out the Coverdell and still have more to invest for college, go with the 529.

Before investing for college, make sure you are investing enough for retirement. Just because you are maxing out your retirement accounts does not mean you are saving enough for retirement.

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Re: 529 v Coverdell v UTM

Postby MarkBarb » Sun Feb 10, 2013 10:21 am

I use a 529 instead of a Coverdell for two primary reasons. There are income limits on who can contribute to a Coverdell ($95K/year, I think). Also, their are contribute limits (only $2,00/year). Our income is higher than that and we contribute $6,000/year/child. Converdell's do offer more flexibility for withdrawals and investments, but I don't think that the advantages are worth the hassle of having two different accounts per child to manage. If your income and contribution amounts are below the limits and you don't get a state tax break for a 529, I'd go with the Coverdell, otherwise I'd go with the 529.

I'd take either of them before even thinking about the UTMA. I see too many disadvantages to the UTMA.

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Re: 529 v Coverdell v UTM

Postby charlestown1978 » Sun Feb 10, 2013 10:47 am

Right, I left out the assumption you qualify based on income limits.
And, let's just assume that you have maxed out your retirement space or have such terrible 401k options that you would prefer to contribute to other low cost tax deferred options. And, maybe, you want to help your children pay for college to some extent. Basically, I want to skip the debate of whether to fund retirement or college first...there are several threads on that.

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