Education Planning Articles |
College Savings Vehicles Compared
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529 plans | Coverdell ESA | U.S. savings bonds | Custodial account |
| Participation restrictions | No | Yes, income limit for contributions and $2,000 maximum annual contribution per child* | No, but ability to exclude bond proceeds from federal income tax depends on income | No |
| Tax-exempt withdrawals (exempt from federal income tax if used for qualified education expenses) | Yes (withdrawals may also be exempt from state income tax, depending on state law, for those who invest in the state plan where they reside) |
Yes (withdrawals may also be exempt from state income tax depending on state law) | Yes, income limits and other requirements must be met (bond proceeds are generally exempt from state income tax) | No |
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Penalties
(when funds aren't used for child's qualified education expenses) |
Yes, a 10 percent federal penalty applies to the earnings portion of all nonqualified withdrawals (a state penalty may also apply) | Same as 529 plans | No, but the bond proceeds won't be exempt from federal income tax | No, but withdrawals from the account can only be made for the child's benefit |
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Federal financial aid treatment
(assets attributed to student are weighed more heavily, resulting in less financial aid) |
Parental asset (if parent is account owner); distributions do not count as parent or student income
(Prior to July 1, 2006, a prepaid tuition plan was treated more harshly than a college savings plan – any distributions from a prepaid plan reduced aid on a dollar-for-dollar basis) |
Parental asset (if parent is account owner); distributions do not count as parent or student income | Parental asset (if parent is owner of bonds) | Child's asset |
| Fees and expenses |
College savings plan:
typically an annual maintenance fee, administration fees, and investment expenses based on a percentage of total account value
Prepaid tuition plan: typically an enrollment fee and various administrative fees |
Depending on the financial institution, there may be fees associated with opening and/or maintaining a Coverdell ESA | No fees or expenses, except for the possibility of brokerage fees if bonds are purchased through a broker | Depending on the financial institution, there may be fees associated with opening and/or maintaining a custodial account |
*The provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 that raised the annual contribution limit for Coverdell ESAs to $2,000 will expire on December 31, 2010. Unless Congress extends the law, after December 31, 2010 the annual contribution limit for Coverdell ESAs will revert to $500, the limit in effect prior to January 1, 2002.
U.S. Savings Bonds are guaranteed as to the payment of principal and interest. The remaining types of college savings vehicles discussed are not guaranteed and are more risky.
Investors should consider the investment objectives, risks, changes and expenses associated with 529 plans carefully before investing. More information about 529 plans is available in the issuer's official statement, which should be read carefully before investing.
The availability of the tax or other benefits mentioned above may be conditioned on meeting certain requirements.
