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 expenses7||Tuition, fees, books, computers and related equipment, supplies, special needs; room and board (including off campus housing) for minimum half-time students. Starting in 2018, in accordance with the Tax Cuts and Jobs Act of 2017, state-sponsored 529 plans can also be used for tuition in connection with K-12 enrollment or attendance at an elementary or secondary public, private or religious elementary or secondary school. There is a $10,000 a year per student limitation for K-12 Qualified Expenses as opposed to college Qualified Expenses that have no annual distribution limit.||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 30.4||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.
7 The tax treatment of such withdrawals at the state level may be determined by the taxpayer's state of residence. Account owners should consult their tax advisors for further guidance.