Comparing college savings plans

Learn about CollegeBound 529

There are several choices for college savings plans — each with its own unique set of rules, features and benefits — understanding the basics is an important first step in the selection process.

There are several choices for college savings plans — each with its own unique set of rules, features and benefits — helping clients understand the basics is an important first step in the selection process.

Below, we highlight important differences among popular college savings plans.

Year 2017 rules 529 Plan Coverdell Education Savings Accounts UGMA/UTMA
 
Federal income tax Contributions made with after tax dollars; earnings grow tax-free and are free from federal income tax when used for qualified higher education expenses1,2 Contributions made with after tax dollars; earnings grow tax-free and are free from federal income tax when used for qualified higher education expenses and/or qualified K-12 expenses1 Earnings and capital gains are taxed at the minor's tax rate.4
Federal gift tax treatment2 Contributions are treated as gifts; Annual gift tax exclusion of up to $15,000 per donor ($30,000 if married, filing jointly) per beneficiary.

A contribution in excess of the annual gift tax exclusion amount up to $75,000 ($150,000 if married, filing jointly) can be prorated over 5 years and treated as a gift in each of those years.
Contributions are treated as gifts; annual gift tax exclusion of up to $15,000 per donor ($30,000 if married, filing jointly) per beneficiary Gifts and transfers to the minor are treated as completed gifts; $15,000 (single filers) or $30,000 (married, filing jointly) as annual gift exclusion
Federal estate tax treatment Value removed from donor's gross estate; up to $75,000 ($150,000 if married, filing jointly)5 Value removed from donor's gross estate Value removed from donor's gross estate unless donor remains as custodian
Maximum investment Established by the program; many in excess of $300,000 per beneficiary6 $2,000 per beneficiary per year combined from all sources No limit
Qualified expenses Tuition, fees, books, computers and related equipment, supplies, special needs; room and board (including off campus housing) for minimum half-time students Tuition, fees, books, supplies, equipment, special needs; room and board for minimum half-time students; additional categories of K-12 expenses No restrictions
Ability to change beneficiary Yes, to another member of the beneficiary's family; see plan's program description for beneficiary change information and restrictions Yes, to another member of the beneficiary's family; see plan's program description for beneficiary change information and restrictions No; represents an irrevocable gift to the child
Time/age restrictions No age restriction unless imposed by the program Contributions before beneficiary reaches age 18. The balance of the account must be distributed 30 days after the beneficiary reaches age 30.3 Custodianship terminates when minor reaches age of majority established under state law (generally 18 or 21)
Income restrictions None Ability to contribute phases out for income between $95,000 and $110,000 (single filers) or $190,000 and $220,000 (married, filing jointly) None
Federal financial aid If the parent is the owner, it counts as an asset of the parent and is assessed up to 5.6%. If the parent is the owner, it counts as an asset of the parent and is assessed up to 5.6%. Counted as student's assets and assessed at 20%
Investments Menu of investment strategies as offered by the program Broad range of securities and certain other investments Investments are chosen by the account owner
Use for Nonqualifying Expenses Non-qualified withdrawals may be subject to federal income tax and a 10% federal tax penalty, as well as state and local income taxes Non-qualified withdrawals may be subject to federal income tax and a 10% federal tax penalty, as well as state and local income taxes Funds must be used for benefit of the minor

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1 Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain withdrawals are subject to federal, state, and local taxes. None of the State of Rhode Island, its agencies, Invesco Distributors, Inc., Ascensus College Savings Recordkeeping Services, LLC, nor any of their applicable affiliates provide legal or tax advice. This information is provided for general educational purposes only and is not to be considered legal or tax advice. Investors should consult with their legal or tax advisors for personalized assistance, including information regarding any specific state law requirements.

2 Some states also offer state tax deductions and credits. Contact your tax advisor for more information.

3 The balance in the account generally must be distributed within 30 days after the earlier of the following events: the beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary; or the beneficiary's death.

4 The first $1,050 of a child's unearned income is tax exempt; income over $2,100 is taxed at parents' rate if child is under 18, or a full-time student under age 24. If child is 19 or older at the end of the tax year and is not a full-time student, all investment income is taxed at the child's rate.

5 Partial inclusion for contributor's death during the 5 year election period. Please contact your tax advisor for more information.

6 The maximum contribution and/or account balance for CollegeBound 529 is $395,000.