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The Difference Between an ESA and a 529 College Savings Plan

By Kira Botkin

If you’ve just had a child, then it’s never too early to start thinking about their future. Sending a child to college is a huge expense, and many parents are unable to fund their children’s college expenses. By the way, it doesn’t make you a bad parent if you don’t pick up the tab for your child’s college expenses. However, if you plan early, you can help change your family tree by helping your child stay out of debt early in their life. The two most popular college savings accounts are the Coverdell Educational Savings Account (ESA) and the 529 college savings plan. Both of these savings plans act much like an Health Savings Account or retirement account, because they are invested in investments such as mutual funds and withdrawals must be used for a specific purpose or at a specific time in one’s life. I’ll give you the pros and the cons for each savings plan, and you can decide which plan will work best for you.


Educational Savings Plan 


  • The invested funds grow tax-free. You are not required to pay taxes on the interest earned.
  • It has a broad definition for “qualified expenses”. Along with tuition, room, and board, it covers items like books, computers, and internet access.
  • the funds can be used starting when the child is in Kindergarten. This is great for someone looking to use the funds to cover private elementary and secondary schooling.
  • Contributions are used with after-tax dollars, but the distributions are tax-free as long as it is used for qualified educational expenses.


  • You must make less than $220,000 a year per married coupleo to be able to contribute to an ESA
  • An ESA only allows you to contribute up to $2,000 per year
  • Contributions are not tax-deductible
  • Beneficiary must be under the age of 30
  • In some states, the assets of the ESA become the property of the beneficiary

    529 Plan


  • The limit for contributions is much higher and allows you to save more aggressively
  • No age limit for the beneficiary
  • Control of the account always stays with the contributor
  • Some states allow 529 plan contributions to be deducted on state taxes
  • Anyone with any salary can open and contribute to a 529 plan
  • Cons:

  • Qualified expenses are limited to tuition, room, board, and books
  • The distributions can only be used for post-secondary schooling
  • You are locked into the investments chosen by the plan administrator
  • ——————-

    Who should open an ESA?

    If you are thinking about sending your child to private school and you want more flexibility with how the funds are invested, I think the ESA is your best option. As long as you meet the income requirements, this would be the way to go. Plus, you can use the money to expensive items such as books, computers, graphing calculators, and other expensive items that college requires.

    Who should open a 529 plan?

    If you are starting out saving for your child’s college expenses later on in their life, then you should definitely open a 529 plan. You’ll be able to aggressively invest and catch up for the years you missed. Plus, if you live in a state where the contributions are tax deductible for your state taxes, you should look into a 529 plan over an ESA.

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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  • http://madsaver.com Mac

    Never even knew about the ESA plan before, so thanks! But I’m glad we started our son on a 529 plan instead. I like that it’s less flexible as there are no plans for private schooling and I really would like him to use the money for a post-secondary school. And the limited qualified expenses this plan allows is actually a plus! No questionable items will be purchased with this money as we’ll know exactly what it’ll be used for. To each their own.

  • Mdamaryan

    Are you allowed to contribute to both plans?

    • Kira Botkin

      Yes, as long as you meet the income restrictions on the ESA, you can contribute the full amount to both plans.

    • Kira Botkin

      Yes, as long as you meet the income restrictions on the ESA, you can contribute the full amount to both plans.

    • Kira Botkin

      Yes, as long as you meet the income restrictions on the ESA, you can contribute the full amount to both plans.

  • Kimneese5

    my understanding is that an ESA becomes the child’s money at age 30 or so, whether they go to school or not. (in other words the account is in their name, not ours as the parents). By contrast, the 529 is the PARENT’S account, and the child cannot have access to it at any age if they chose not to go to college. Can you confirm this? Of course I plan on my 1 and 2 year olds to be perfect little angels…but should one of them decide to grow up and run away with their meth-head boyfriend, I don’t want them getting all the money when they turn 30. Thanks!

    • Msb


  • Kimneese5

    ….and that was of course intended as a joke… but ya never know! : )

    • Msb

      You never do know, it was a smart question, not sure why it was not answered. Anything can happen in life.

  • Joelemans

    That family tree thing was Dave ramseys line, but good article none the less

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