Types of Education Savings Accounts

Types of Education Savings Accounts

Planning for college can be an exciting time, but it can also be overwhelming, especially when it comes to figuring out how to pay for it. There are various account types to consider when saving for your child’s education. Here are a few options:


A Uniform Gifts to Minor Account/Uniform Transfer to Minor Account is a bank or brokerage account with an adult custodian that is owned by a minor. Parents, Grandparents, and other family members can gift money in this account as a way for a child to save for college. Taxes are paid at the parents’ rate after the first $2,600 of unearned income. For 2024 the first $1,300 is tax-free, and the next $1,300 is taxed at the minor’s rate. One downside of these accounts is the minor gets control of the funds when they become a legal adult. Once they have control, they could use the money for something other than your intended college or educational purposes. There is also limited tax benefit to a UGMA/UTMA.

Coverdell Education Savings Account (ESA)

A Coverdell ESA is an education funding tool that offers tax-free earnings growth with tax-free withdrawals when the funds are spent on qualified education expenses. Qualified educational expenses include tuition, books, fees, supplies, computers, and sometimes room and board. A Coverdell has some limitations: You can only deposit up to $2,000 a year into the account, and the contributions must stop when the beneficiary reaches age 18. In addition, all the funds must be spent by age 30. At that point, you can switch the beneficiary or roll the money into a 529 account without tax penalty. Coverdell contributions are also limited by contributor’s income, with phaseout for both 2023 and 2024 between $95,000 to $110,000 for single taxpayers and $190,000 to $220,000 for married filing jointly. The maximum total of $2,000 is across all Coverdell Accounts for the student, so family members will have to coordinate if multiple people are saving for a student’s education.

One advantage of the ESA is that it can be used for many K-12 expenses, including tuition, books, supplies, uniforms and even room and board. The Coverdell Education Savings Account is similar to your brokerage account in that it can hold stocks, bonds, and mutual funds. Contributions to Coverdell are similar to an IRA in that they must be made by tax filing day. There is no tax deduction for contributions made to a Coverdell Account.

One of our advisors recently had a meeting with a grandmother and her 18-year-old granddaughter, who were getting ready to begin her first year of college. At the meeting, Grandma shared with her granddaughter that she had been putting $2,000 into a Coverdell every year since she was born. That $36,000 in deposits were invested and had grown significantly – enough to fund most of her expected college costs. A very happy celebration followed thanks to a well-executed savings plan.

Download our resource: Summary Comparison of 529 Accounts and Coverdell Education Savings Accounts.

529 College Savings Plan

One of the most popular savings vehicles for college is a 529 college savings plan. These accounts can invest only in mutual funds, with the fund options being determined by which state plan you choose. You don’t need to invest in the state plan where you reside; compare the state plans to see which is the best fit for you. There are no annual contribution limits on a 529 plan; however, there are aggregate contribution limits. Contributions to a 529 plan count as gifts for tax purposes. The current annual gift tax exclusion stands at $18,000 per beneficiary for 2024 ($36,000 for gifts from a married couple). There are also no income restrictions for contributions. Parents or other family members, such as grandparents, can open accounts for the same beneficiary.

A 529 plan also allows a donor to make five years of donations lumped into one $90,000 contribution as long as no other gifts are made to the same beneficiary for the next 5 years. This can be a good estate planning tool as the $90,000 is outside of the donor’s estate, but they still are in control of the assets. The 529 plan is an investment account that lets the donor control the funds while keeping them in their own name. With few exceptions, the named beneficiary has no legal rights to the funds, unlike a UGMA/UTMA where the child takes control of the assets once they reach legal age. If the child named beneficiary chooses not to go to college, you can repurpose the money.

Similar to a Coverdell Account, in a 529, assets grow tax-free and the withdrawals on qualified expenses are tax-free. If the money is used for some other purpose, the earnings are taxed as ordinary income and there is a 10% penalty. The 529 has the flexibility of changing the beneficiary within the family with no penalty, subject to generation skipping, if the student decides not to attend college. Parents can name themselves the beneficiary if there is money left over to take classes.

Legislation has been passed over the last couple of years that has enhanced some of the capabilities of a 529 plan which is beneficial for parents and grandparents that are looking to save for college. The Tax Cuts and Jobs Act of 2017 allows up to $10,000 a year per beneficiary to pay for K-12 tuition expenses (residents of California will have to pay state income taxes and a 2.5% state penalty tax on earnings used for K-12 tuition). Unlike the Coverdell Savings Account, the 529 Account can’t be used for other K-12 expenses. The SECURE Act passed in 2019 opened the door for student loan repayments up to $10,000 per borrower (lifetime limit) for the beneficiary of a 529. Some states do not conform with federal law; check with your state before taking a disbursement to pay-off student loan debt. California conformed to the federal law in October of 2021 and now allows the use of $10,000 per borrower for student loan repayment.

​​529 College Savings Plan to Roth IRA rollovers – This was a late addition in the legislative process to the final SECURE Act 2.0 bill with the ability to allow tax and penalty-free rollover from a 529 college savings plan to Roth IRA, with limitations. The beneficiary (child) of the 529 college savings account, which must have been opened for 15 years, must move the funds to a Roth IRA in their name. The lifetime rollover limit is $35,000 of unused 529 college funds to the Roth IRA. Income limits don’t apply as they do for regular Roth contributions.

Download our resource: Summary Comparison of 529 Accounts and Coverdell Education Savings Accounts.

Changes to Grandparent 529 Plan Rules

With the release of the new Free Application for Federal Student Aid (FAFSA), the amount of a student’s “total income,” which includes untaxed income, will come directly from the federal income tax returns via the IRS Data Retrieval Tool (DRT). This means students do not have to report a distribution that was taken from a grandparent’s 529 plan in 2024 and beyond.

Prior to the new rules, the student would report the 2023 distribution as untaxed income on the FAFSA. 529 plans owned by a grandparent will not be reported as assets on the updated FAFSA either. The grandparent’s 529 plans are still considered on the CSS Profile, which is an additional financial aid form used by some private colleges.

Click here for more information about Understanding Financial Aid: The FAFSA Process.

Are 529 Plan Contributions Tax-Deductible?

Currently, 529 contributions are not tax-deductible at the federal level. Over 30 states and the District of Columbia offer state income tax deductions or tax credits for contributions to a 529 plan. Unfortunately, California is one of the states that does not offer a tax deduction for contributions to a 529. Tax-free growth is still a key benefit of 529 Accounts.

529 Prepaid Tuition Plans

Another option for college savings is a 529 Prepaid Tuition Plan that allows for pre-payment for some or all of the costs of an in-state public college. The price of the tuition is locked in at today’s prices at participating institutions.

Take a look at our College Financial Planning with College Savings Analysis article and we can help you estimate college tuition costs.

Education savings accounts (ESAs) have emerged as a powerful and flexible tool for families to secure a brighter educational future for their children. By offering an opportunity to save and invest in a tax-advantaged manner, these accounts encourage long-term planning and create a financially secure foundation for the next generation. Furthermore, the flexibility to use ESA funds for a diverse range of educational expenses empowers parents to make informed decisions about their children’s unique educational paths. As the landscape of education continues to evolve, education savings accounts will play a vital role in ensuring that families can access the best possible opportunities for their children, paving the way for a better-educated and prosperous society.

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