Do you know someone who wants to attend college or a post-secondary institution? If so then you may have heard of the cost of a post-secondary and college education is not pocket change.
If you or someone you know is saving for higher education this article will reveal the advantages and disadvantages of both the Education Savings Account and 529 Savings plan.
Both plans have unique benefits, and offers a planned by design alternative to student loans.
In 2012 – 2013 49% of first time higher education students received student loans.
Loans are not the only answer there may be a better way. Which plan is better for you… ESA versus 529 College Savings Plan?

What is a ESA?

The letters ESA stands for Education Savings Account. This is just what the name implies an account dedicated for education savings. To dive a bit deeper the savings account can be used to pay qualified education expenses.
What’s considered qualified education expenses? As described by the irs.gov the following are qualified expenses for designated beneficiaries under the age of 18 or must have a special need over the age of 18.

ESA Qualified Expenses

Expenses associated with attending eligible institutions, elementary, and secondary schools that accept the student aid program governed by the United States Department of Education. Therefore, if the education center allows U.S. Dept of Education student aid then you will be able to use the funds saved in an ESA for qualified expenses.
An ESA can be opened through a FDIC bank and various brokerage companies.

Qualified higher education expenses

1. Tuition and Fees
2. Books, Supplies, and Equipment
3. Room and board for the enrolled beneficiary, and the beneficiary must be enrolled at least half time.
4. Computers, computer equipment, computer software, and internet access. These purchases must be primarily for education purposes.

Qualified Elementary and Secondary expenses

1. Tuition and Fees
2. Books, Supplies, and Equipment
3. Room and board for the enrolled beneficiary, and the beneficiary must be enrolled at least half time.
4. Computers, computer equipment, computer software, and internet access. These purchases must be primarily for education purposes.
5. Academic tutoring
6. Uniforms
7. Transportation

Advantages of an ESA

ESA is a tax advantaged account that allows you to contribute after tax dollars to a savings account and the earnings of the savings account can be disbursed for qualified education expenses mentioned above. This means the beneficiary of the ESA will be able to use the funds in the account tax-free as long as the purchases are directly school related.

Disadvantages of an ESA

ESA contributions must be made in cash, no more money can be added to the account after the beneficiary turns 18 years of age.Unless the beneficiary has a special need No more than $2,000 dollars can be added to a ESA account per beneficiary per tax year.
For example, two people could contribute to an ESA, but the total contributions are maxed out at $2,000. Furthermore, contributions are not tax-deductible, and the contributor’s income cannot be over $110,000 single and $220,000 joint status(Numbers as of 2016).

What is a 529?

A 529 Plan is a tax advantaged savings plan that allows the contributor to pre pay tuition or save in an investment account on behalf of the beneficiary. All states in the U.S. offer one of the two forms of 529 plans.
529 plans were created by congress in 1996, and the numbers 529 represent the section in the IRS code.

The two forms of 529 Plans are prepaid tuition and College savings plan:

529 Plan: Prepaid Tuition

This plan will lock in the cost of tuition for a private and public college and university

As the name implies tuition is prepaid and can be made in lump sum or installment payments. Payments are based on age, and the number of years of higher education purchased.

529 Plan: College Saving Plan

This plan covers tuition and fees, room and board, books, and computers (computer equipment, computer software, and internet services as long as it’s primary use is for higher education).

Most plans have contribution limits of $200,000

Anyone can set up a 529 plan for a beneficiary and the beneficiary can be a family member, a friend, your child or grandchild, and yourself.

Advantages of a 529

Contributions to 529 plans are not restricted to the state the beneficiary resides in or plans on attending school. Contributions can be made to any plan in the 50 states of the U.S.A.
Depending on the state you live in there maybe some additional state specific tax advantages such as deductions on state taxes but not federal taxes. Investing in a 529 will allow you the option to pick the investments inside of the saving plan and self direct the investment.

Disadvantages of an 529

Prepaid tuition plans have a limited enrollment window and time period will vary by state. Also, the prepaid option will only cover mandatory fees and tuition.
Whereas the College savings plan will cover qualified higher education expenses in addition to tuition and fees. Contributions to a 529 plan in most cases are not tax deductible; check your state for details.
As of 2016, 529 plan contributions cannot exceed $14,000 in a tax year. If the contributions exceed this amount there will be a gift tax penalty.

College Savings Plan

You may be thinking why should I use one of these plans and not just save for college in a regular savings account or in the stock market. These plans allow tax advantages for the growth of the money saved for education.
Thereby, allowing the beneficiary to attend an educational institution with the money set aside in the plan, and not pay tax. On the other hand, withdrawing money from a college savings account for expenses not considered qualified expenses.
Or used for any other purpose will be taxed with a 10% penalty plus your income tax rate. That could be a healthy chunk of your saving if you choose not to use the savings for college related expenses.
Choosing any other investment type will not have the same tax advantages and the growth of the investment will be taxed at the normal capital gains rate. ESA versus 529 College Savings Plan which side will you choose?

Any questions let me know in the comments below.

For more information visit the links below:
https://www.irs.gov/publications/p970/ch07.html
http://nces.ed.gov/programs/coe/indicator_cug.asp
https://www.irs.gov/uac/529-plans-questions-and-answers