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College Planning |
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College Savings Products
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College costs have been rising at a remarkable pace over the past two decades. Because a college education is increasingly seen as a key to financial and social achievement, and because of the high and rising cost of a degree, many investment options have been developed to assist families in their college funding plans.
Coverdell Education Savings Accounts
Coverdell Education Savings Accounts offer a highly flexible way to build funds for college on a tax-free basis. The maximum annual contribution limit for an ESA is $2,000 for each child under age 18. Benefits include:
- Tax-deferred growth —
contributions are not tax deductible, but assets in these accounts are tax deferred, meaning they grow tax free.
- Tax-free withdrawals —
assets are withdrawn federally tax free as long as the money is used to pay for education costs such as tuition, room and board.
- Eligibility —
anyone can contribute, subject to certain income limits. Any individual whose modified adjusted growth income for the year is less than $110,000 ($220,000 for a joint return) can contribute.
- Investment flexibility — choose among a broad range of investments, including stocks, bonds, mutual funds and more. You can also shift your investments as your financial goals and/or risk tolerance changes. This gives you freedom to structure an investment plan to help keep pace with college cost inflation and help you reach your college funding goal.
- Beneficiary flexibility — if a child does not use the money in his or her ESA, the assets can be transferred to another child in the same family.
529 Savings Plans
529 college savings plans are offered in every state and offer certain federal and state tax advantages. Generally, each state runs its own 529 program, and many offer additional state tax benefits to residents who choose to invest in their own state 529 plan.
Investors deposit after-tax income into an account that typically offers a range of investment options. Contributions are not federally tax deductible, investments grow tax-deferred and distributions are tax-free (as long as the money is used to pay for qualified higher-education expenses). If the money is used for other purposes, the earnings portion of the withdrawal is subject to ordinary federal income tax and any applicable state income tax and an additional 10% federal tax.
Education Savings Bonds
Series EE and Series I savings bonds are always exempt from state and local taxes. These savings bonds may also pay interest free of federal taxes for parents who meet certain income limits if the bonds are cashed in to pay for college tuition and fees.
Mutual Funds
While a direct investment in a mutual fund doesn't offer the potential tax advantages available in college savings vehicles, they are good investment options to consider, should you reach the maximum allowable contribution in a Coverdell or 529 account.
| Tax-Favored College Savings Options — Summary Overview |
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Maximum Contribution
Per Account |
Income Limits
for Contributions |
Income Tax Treatment |
| Coverdell ESA |
Up to $2,000 per year per beneficiary
until child turns 18 |
Single return: 110,000
Joint return: $220,000
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Tax-free growth if used for qualified education expenses
(college, high school, elementary)
Contributions nondeductible |
| 529 Savings Plan |
Varies by state plan, usually lifetime
limit ranges from $100,000–$300,000 per beneficiary |
No limits |
Generally tax-deferred growth
State tax deduction on contributions in some states
Tax-free distributions for qualified higher education costs |
| Education Savings Bonds |
Unlimited |
No limits |
Tax-deferred or tax-free growth if used for college costs
State tax exclusion |
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Gift Tax Treatment |
Effect on Financial
Aid |
Withdrawal Rules
Other Considerations |
| Coverdell ESA |
Eligible for annual gift tax exclusion
of $12,000 ($24,000 for married couples filing jointly)
Completed gift from owner to beneficiary |
Assets treated as beneficiary's |
Broad investment choices
Rollovers allowed
Can change beneficiary
Can contribute to ESA and 529 plan in the same year and
withdraw from both in the same year for same beneficiary without
penalty |
| 529 Savings Plan |
Eligible for annual gift and
GST tax exclusion
Fund up to $60,000 in one year ($120,000 for married couples
filing jointly)
Completed gift from owner to beneficiary |
Assets treated as account owner's |
Flexible funding
Can change beneficiary
Rollovers allowed
Fixed investment choices
Can contribute to ESA and 529 plan in same year for same
beneficiary without penalty |
| Education Savings Bonds |
Any gift from owner eligible
for $12,000 annual gift tax exclusion |
Assets deemed account owner's unless
gifted to beneficiary |
Low growth
Little flexibility
Can change beneficiary |
| UGMA/UTMA |
Eligible for annual gift tax exclusion
of $12,000 ($24,000 for married couples filing jointly)
Completed gift from owner to beneficiary |
Assets treated as beneficiary's |
Broad investment choices
Rollovers allowed
Child controls assets at age of majority
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A financial advisor can help you determine which college savings vehicle is right for you. If you don't already have one, call us at 1-800-896-2645 for assistance.
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