Coverdell ESAs have lower maximum contribution limits. From 2002 to 2012, $2,000 is the maximum contribution per year per child. In other words, if there were multiple contributors and multiple ESAs for a single child, the total annual contribution of all those accounts combined must be less than $2,000 to avoid penalties. In 2013, the "fiscal cliff" deal made the $2,000 contribution limit permanent. 529 plans generally have no restrictions on contributions, up to the maximum lifetime contribution.
Coverdell ESAs can allow almost any investment inside including stocks, bonds, and mutual funds, while 529 plans only allow a choice among a number of state run allocation programs. The rules for investments allowed in ESAs are the same as those for IRAs.
Age limit: Balances in a Coverdell ESA must be disbursed on qualified education expenses by the time the beneficiary is 30 years old or given to another family member below the age of 30 in order to avoid taxes and penalties; there is no age limit for 529 plans.
Coverdell ESAs allow withdrawing the money tax free for qualified elementary and secondary school expenses; 529 plans do not.
The income level of a donor may affect contributions into a Coverdell ESA, but would not affect contributions to a Section 529 plan.
When the student is a dependent and not an owner of the account, money in both a Coverdell ESA and a 529 plan is not considered the child's (beneficiary's) money when applying for federal financial aid. The child's potential financial aid is increased compared to when the student is not a dependent and the account owner, because the Expected Family Contribution will be 5.64% as opposed to 20%.
The custodian of both an ESA and a 529 plan can designate a new beneficiary without incurring taxes or penalties provided that the new beneficiary is an eligible family member of the previous beneficiary (child, niece, nephew, grandchildren).
Coverdell Education Savings Account Wikipedia
A Coverdell Education Savings Account (also known as an Education Savings Account, a Coverdell ESA, a Coverdell Account, or just an ESA, and formerly known as an education individual retirement account), is a tax-advantaged investment account in the United States designed to encourage savings to cover future education expenses (elementary, secondary, or college), such as tuition, books, uniform, etc. (for the same year as the distribution). It is found at section 530 of the Internal Revenue Code (26 U.S.C. § 530). Coverdell ESAs were first introduced in 1997, under the Taxpayer Relief Act of 1997.
The tax treatment of Coverdell ESAs is much the same as that of 529 plans with a few important differences. Like a 529 plan, Coverdell ESAs allow money to grow tax deferred and proceeds to be withdrawn tax free for qualified education expenses at a qualified institution. However the definition of qualified expenses in an ESA includes primary and secondary school, not just college and university.
The account is named for its primary champion in the U.S. Senate, the late Senator Paul Coverdell (R-GA).