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I was recently introduced to ESAs (did not know they even existed), and am trying to decide if I want to open an ESA or a 529 account. I was attracted to the ESA initially because it looks like you can select a fund among several funds, where as it appears that the 529 plans offered are a fund and you don't have a choice to select anything but the 529 itself. It also seems like you can use ESA to fund more than post-secondary school education.

So, a few questions:

  • Is it possible to use an ESA or 529 to fund vocational education? I hate to assume my child will go to college because you never really know. Perhaps he'll want to do art school or become a certified electrician?

  • Can you use an ESA or 529 to pay for study abroad or even education abroad?

  • Are there expirations with the ESA or 529? Example, my kid decides to join the military and puts off college until his/her thirties. Do the funds expire and I end up paying a penalty for having to withdraw the money?

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This is a partial answer. Coverdell ESA must be withdrawn when the beneficiary turns 30. The 529 has no such age restriction. A decent comparison is at Coverdell Education Savings Accounts a wiki entry at the Bogleheads site.

To add another point, the Coverdell limit is $2000 per year deposit, the 529 is subject only to the rules of gift taxation, so a couple can deposit up to $140K this year, taking advantage of the ability to gift ahead, and while paperwork is due to declare the gift, no tax is assessed.

2018 update. The annual gift exclusion is now $15K per person. To clarify my math above, this means a couple can gift $30K combined. The 529 offers the ability to gift up the 5 years effectively offering a couple the chance to fund the account with $150K to really get it going.

  • I think you meant 14k – Daniel Dec 30 '15 at 18:13
  • Ah no, you're taking into account the ability to gift-ahead 5 years and both members of the couple contributing the max. Never mind :) – Daniel Dec 30 '15 at 18:14
  • @Daniel - No problem, but I should return, and edit a better explanation of where the 10 times the normal $14K/yr comes from. – JTP - Apologise to Monica Dec 30 '15 at 18:29
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Coverdell ESA's are more flexible to invest in and to use than 529 plans. They also generally have lower fees, which take a bite out of the account value. For someone that cannot predict the future (like which state their child will decide to get an undergraduate degree from), Coverdell ESA's are a better choice.

  • There are two types of 529's. One is a pre-paid tuition plan in which you purchase in advance for a lump sum X semesters of education, those work best if you know your child will go to a state school in a specific state. The second one is where you contribute money into a fund, it can be used for any qualified school in any state. – mhoran_psprep Feb 4 '18 at 12:07

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