Talk about money: College savings picture a little clearer

The choices about how to save for college just got clearer.
We didn’t know what would happen to Coverdell education savings accounts if the U.S. had fallen over the so-called fiscal cliff — but we didn’t go over the cliff, and now a top expert on saving for college has turned positive on Coverdells.
For years, parents and grandparents have used 529 plans and Coverdell accounts as a tax-free way to invest for a child’s future education.
The benefits of the 529 plan were not in danger. But if Congress hadn’t reached a deal by the deadline, tax cuts enacted a decade ago under President George W. Bush would have expired, taking away many of the advantages of the Coverdell. 
That problem was averted when Congress passed the 2012 American Taxpayer Relief Act at midnight New Year’s Day, and President Obama signed it into law.
When I spoke with Joseph Hurley of Savingforcollege.com for my column last July, he steered investors away from Coverdells and toward 529s because of uncertainties about the Coverdell rules. When I contacted him last month, he gave Coverdells a thumbs-up.
 “Coverdells can be a good vehicle now that its provisions have all been made permanent,” he said.
Hurley now recommends both plans. Each has its pros and cons. Here’s a review of how they work.
A 529 lets you invest large amounts of money, but most 529s limit the investments to a family of mutual funds. Growth is tax free. When the child starts college, the money can be withdrawn tax free as long as it is used for tuition, room and board, or other “qualifying” expenses. 
The donor names a child as beneficiary, but can later change his or her mind and switch to a related beneficiary or reclaim the funds. Any non-qualified withdrawal, one that isn’t used for higher education expenses, subjects the donor to income tax plus a 10 percent penalty on the earnings.
All 50 states sponsor 529 plans. Some states offer additional tax incentives to residents to invest in that state’s 529 plan. California doesn’t, so residents of the Golden State can consider 529 plans from any state purely on their investment potential.
While 529 plans are the collegiate equivalent of 401(k) retirement plans, Coverdell accounts act more like Roth IRAs.
The tax treatment of a Coverdell is much the same as a 529, but here are some differences.
– Contributions are limited to $2,000 a year.
– If a donor’s income is too high, he can’t contribute to a Coverdell.
– Money can be invested in individual stocks or bonds, not just mutual funds, like a 529 plan.
– You can take money out of a Coverdell for any education expenses, including kindergarten through 12th grade, while 529 assets must be used for college.
– Coverdell donors can switch the beneficiary to an eligible family member, but unlike the 529, the donor can’t reclaim the money.
If the Bush tax cuts had not been renewed, then the limit on Coverdell contributions would have dropped from $2,000 to $500 a year, and using the money for pre-college expenses wouldn’t have been allowed. But Congress’ 11th-hour deal again makes the Coverdell a useful option.
“If you are partial to the self-directed nature of Coverdell ESA investments,” Hurley said, “or are planning to spend money for private grade school, you should be pleased.”
– Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 831-439-9910 or

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