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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: secondcor521 on August 22, 2013, 12:12:43 PM

Title: Withdraw from 529 or ESA first?
Post by: secondcor521 on August 22, 2013, 12:12:43 PM
Hi all,

My oldest is starting in college this fall.  He has both a 529 and an ESA account, which represent 2 of the 14 ways to pay for college that I have identified.

Between those two accounts which would you recommend withdrawing from first and why?

Right now I plan to use ESA funds first and 529 funds second, but I'm open to input.

Right now it looks like there will be enough in there to get him through graduation.  I plan to roll down unused funds to his younger siblings after he graduates.

Title: Re: Withdraw from 529 or ESA first?
Post by: seattlecyclone on August 22, 2013, 01:08:33 PM
The ESA has the advantage of being allowed to be used for private primary/secondary schools, but if your kids go to public schools I don't think it matters much from a tax perspective.

Do the two accounts have any difference in what you can invest in? If so, spend the one with worse options first.
Title: Re: Withdraw from 529 or ESA first?
Post by: avonlea on August 22, 2013, 03:27:53 PM
Hi, secondcor521.  I am not super familiar with ESA's so I can't really help you with the original question.  But I do have a suggestion.  You might want to consider cashflowing the first $2500 of college expenses.  If you cover all expenses with a 529 or ESA, you could face a "double dipping penalty" at tax time if you are wanting to receive a credit. 

Here are a few webpages with more detailed information:
Here’s the problem: The government will punish you if you try to claim the American Opportunity, Hope or Lifetime Learning education tax credits for the same expenses that you pay with the cash from your 529 plan or Coverdell Education Savings Account.
Why the double-dipping rule? You are already enjoying a tax benefit via Uncle Sam when you pull tax-free money out of a 529 or Coverdell. The government doesn’t want you to get yet another tax freebie for the same cash.
The Hope Scholarship and Lifetime Learning tax credits can be claimed in the same year that you take a tax-exempt distribution from a section 529 plan or a Coverdell Education Savings Account, but the distribution may not be used for the same qualified higher education expenses.

This one gives specifics about qualifications for the education credits:

Congratulations on your oldest starting college!  I'm sure you must be very proud. :)
Title: Re: Withdraw from 529 or ESA first?
Post by: secondcor521 on August 22, 2013, 08:35:06 PM
@seattlecyclone, yes, my kids do go to public schools, so I see your point there.  As far as investments go, I like what I've got the ESA invested in more than the 529, so that tips the balance the other way.

@avonlea, thanks for the links!  The tax credits and deductions are on my list as ways to pay for college and are definitely a priority ahead of using the ESA or 529.  In my case I can't claim them due to too much income, but that's a good problem to have.

And yes, I am super proud of him!  He's starting off with a full-ride scholarship, a $1K / year stipend, 23-26 college credits from AP exams, and is pretty solid on his major.  So he's got a good start...we'll see how he does...
Title: Re: Withdraw from 529 or ESA first?
Post by: fiveoclockshadow on August 22, 2013, 09:09:11 PM
If you think money will be left over the rules for the two are different. Read here: (