College Savings Plan Comparison Chart

Custodial Account

Coverdell Education Savings Account (ESA)

529 Savings Plan

529 Prepaid Tuition Plan

Description

Account established at a financial institution

Managed by parent or another designated guardian

Assets must be used for benefit  of child.

Savings vehicle that allows assets to accumulate tax deferred

Can be established by parents, grandparents, or family friends

Maximum contributions of $2,000 per beneficiary, per year

Investment account that allows money to accumulate tax deferred for K–12 tuition expenses, registered apprenticeship programs, college expenses, as well as to repay qualified student loans

Sponsored by a state and managed by various financial institutions

Savings plan designed to increase in value at the same rate as college tuition

Can be sponsored by a state or a private college or university

Contract plans offer prepurchase of specified number of years of tuition; unit plans offer prepurchase of percentage of tuition costs.

Advantages

Assets controlled by custodian

Income earned is taxed to the child. Kiddie tax rules apply if the child is younger than 19 or younger than 24 if a full-time student.

Account costs generally low; no trustee costs

Distributions exempt from federal taxes if used to pay qualified education expenses of beneficiary

Can be used to cover elementary and secondary school expenses, as well as college

Unlimited investment options

Can be rolled over to another ESA for same beneficiary or another family member

Account assets professionally managed

Investment choices within plan can be modified for a single beneficiary twice in a single calendar year without tax penalty.

Account owners can change the plan beneficiary (if the new beneficiary is a relative of the previous beneficiary).

Withdrawals are federally tax exempt if used for K−12 tuition and qualified expenses; registered apprenticeship programs fees, books, and required equipment; as well as college expenses, including tuition, room and board, fees, books, and equipment; can be used for qualified distributions for elementary and secondary school expenses, up to $10,000 per year, per student. (Please note: Not all states recognize these updated federal K–12 provisions. Be sure to check with your state.)  Repayment of qualified student loans has a lifetime limit of $10,000 for a 529 plan beneficiary and additional $10,000 per sibling of the plan beneficiary.

Future college tuition costs can be locked in at today’s prices.

Offers a form of guaranteed return, as account value is designed to increase at pace of tuition cost inflation

Trade-offs

Child gains complete access to account at age of trust termination (generally age 18–21, depending on state).

Transfers are irrevocable.

Income limitations on donor: Contributions phased out for incomes between $95,000 and $110,000 (single filers) and between $190,000 and $220,000 (joint filers)

Contributions may be made until student reaches  age 18.

Remaining funds must be distributed to beneficiary at age 30, with earnings taxed as ordinary income plus 10 percent penalty.

No guaranteed rate of return

Distributions not used for qualified higher education expenses are subject to federal income tax plus 10 percent penalty; taxes and penalties apply only to earnings in account.

Beneficiary must attend one of the plan’s participating colleges (typically a public college within that state) in order to receive maximum benefit.

Covers only undergraduate tuition costs

Most plans require all withdrawals be made within 10 years from when student starts college and by age 30.

Distributions not used for qualified higher education expenses are subject to federal income tax plus 10 percent penalty; taxes and penalties apply only to earnings  in account.

Financial Aid Impact

High impact

Treated as asset of child

High impact if account is owned by student

Low impact if account is owned by parent

Treated as asset of account owner

Qualified distributions are not considered income of parents or student.

Low impact

Treated as asset of account owner (custodial versions of 529 plans treated as parent assets of dependent students)

Qualified distributions are not considered income of parents or student.

Low impact

Treated as asset of account owner; asset value equals refund value of plan (previously treated as a resource and reduced aid dollar-for-dollar)

Qualified distributions are not considered income of parents or student.