Coverdale ESA vs. 529 Plan (Savings for education expenses)?

My niece is turing one very soon and I was thinking of setting up an account for her for future education expenses.

Here are the facts:

1) I live in a different state than she does
2) My sister does not have the same last name as her (she has not changed yet, but she will eventually)
3) I do not have a lot to put down right now to open the account

Thanks for your help!

Hi, I picked out your question and answered it at www.coddleshell.com - my own personal finance blog. I'll paste the answer here for you. I hope this helps :)

This can be a common question for people wishing to save for their child鈥檚 or another child鈥檚 education. There are many similarities between the two plans as well as a few key differences.

529 plans and Coverdale ESA鈥檚 are tax-sheltered education plans that allow you to invest money and let it grow tax free. However, you must use the funds for qualified education expenses. An advantage of both include the fact that come college time, the money in these accounts do not affect the student鈥檚 financial aid.

529 plans offer a wide range of opportunities to save. Every state has them and every state is different. Some states will allow people from another state to invest, some won鈥檛. Some have minimum startups or minimum monthly investments and various other fees. 529 plans usually do not have a maximum contribution limit, whereas Coverdell plans do ($2,000 per year per child). 529 plans allow investment in certain select investment options, ESA鈥檚 let you invest in stocks, bonds, etc. 529 plans pay for college expenses only, ESA鈥檚 let you use the money for primary and secondary school as well.

To answer your concerns:

You do not have to be in the same state as the beneficiary. However, it is sometimes advantageous to invest in a 529 plan from your own state. Many states offer tax advantages (Ohio鈥檚 529 plan lets you deduct up to $2,000 in contributions) that offer even greater savings. You can change the beneficiary at any time and you still have full control over the account as long as you are custodian.

Your sister has nothing to do with the 529 plan you set up other than to say, 鈥渢hanks.鈥?You are the owner of the plan, her daughter is the beneficiary. She does not come into the equation at all.

You do not need a lot to start up a plan. Ohio鈥檚 529 plan lets you contribute as little as $15 at a time. There are a lot of investment options to help it grow for differing time periods. Since she is so young, aggressive growth is good, when she gets closer to 18, there are options to scale back growth in favor of asset protection.

Another concern I think should be answered is that your niece can go to any college in the country and still receive distributions from the plan. Some plans also are FDIC insured and can offer extremely low annual fees. The best thing to do would be to contact a financial advisor or tax professional to help you better understand the benefits that come along with each plan.