529 Plans vs. 523 Plans
- A 529 education savings plan is operated by states or educational institutions and is designed to assist families in saving for their children's college costs. Plans derive their name from Section 529 of the 1996 IRS code that established the plans. According to the website "Saving for College," 529 plans are available in every state as of 2011. A 529 plan can be a savings plan similar to a 401k plan or an IRA, or a pre-paid plan in which all or part of college costs are paid up front. Like many retirement savings plans, 529 plans utilize after-tax money and are non-deductible contributions that accumulate tax-free interest. Withdrawals also are tax-free when used for college expenses. The plan's assets are owned by the custodian, which usually is a parent or parents of the beneficiary, or child. The other primary college-savings option is a Coverdale ESA, or education savings account.
- Both 529 plans and Coverdale ESAs are considered qualified tuition programs, or QTPs, by the IRS. Although contribution limits vary greatly among 529s and Coverdale plans, the IRS limits the total distribution amounts to not "more than the amount necessary to provide for the qualified education expenses of the beneficiary." Both types of savings plans are tax-deferred and, when used for college expenses, actually are tax-free.
- As of 2011, contributors to ESAs must earn $95,000 to $110,000 a year if single or $190,000 to $220,000 if married and filing jointly. A 529 plan has no such stipulation. With ESAs, contributions must be made before beneficiaries turn 18 and beneficiaries must use all assets before age 30. There are no contribution age limits or distribution limits with a 529 plan. Contributions with ESAs are limited to $2,000 annually, with the figure dropping to $500 in 2012. A 529 plan's total contribution limits vary by state from $100,000 to $350,000. A 529 account holder controls withdrawal times and purposes and can change beneficiaries whenever he likes, with no restrictions about when funds are used. ESA holders also can change beneficiaries at will but, if the money isn't transferred to a new beneficiary or used for college expenses, beneficiaries receive assets at age 30 and must pay taxes and penalties.
- According to the website Bankruptcy Law Network, "Section 523(a)(8) of the bankruptcy law states that student loans cannot be discharged, unless payment of the student loans would impose an undue hardship upon the debtor or his dependents." Because 529 plans and Coverdale accounts are not student loans but are savings accounts, Section 523 bankruptcy legislation doesn't apply. Federal bankruptcy laws have gotten progressively stricter since 1978 on the dischargeability of student loans when filing for bankruptcy.
