Self-Directed Coverdell Education Savings Account vs. the 529 Plan

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With education costs seeming to swell with the approach of each new generation, parents (and grandparents) have been pushed to think about saving for future generations’ education costs earlier and earlier. Luckily, the Federal government does provide some assistance for tax payers in the form of tax-advantaged accounts that can be used for the specific purpose of saving for future educational expenses.

The two main account types that can help parents stay ahead of the curve of educational expenses are the 529 Plan, and a Coverdell Education Savings Account (ESA). Both plans allow investors to grow tax-free earnings that remain untaxed when taken out for qualified distributions. However, the difference in investment options available to the two accounts can set the Coverdell ESA apart from the 529 in a beneficial way for investors.

A 529 plan offers a hands-off approach to saving. These plans are only offered through a state-approved financial institution. Consequently, investment options for 529 plans are strictly limited to the assets offered by banks, which is typically only traditional securities.

On the other hand, a Coverdell Education Savings Account can be opened with a self-directed IRA provider, giving it the power and freedom to invest in a myriad of alternative assets that remain independent from the ebb and flow of the stock market. Self-directed Coverdell Education Savings Accounts can be invested in real estate, precious metals, private notes, and more. This means parents (or grandparents) with prior investment knowledge and experience can put their expertise to work for the benefit of their children’s (or grandchildren’s) education savings.

Because a self-directed Coverdell Education Savings Account was created to help the designated beneficiary further their education, contributions can be made only until the beneficiary reaches the age of 18, except in the case of a special needs beneficiary. The IRS also mandates that all cash and assets must be distributed from the account within 30 days after the beneficiary turns 30. This distribution requirement creates a bit of a time crunch for self-directed Coverdell ESA account holders, which is all the more reason for investors to call their self-directed IRA provider today to start saving now. Send us an e-mail at or give us a call at 877-742-1270 to get more information about the Coverdell Education Savings Account.