A 529 plan offers unmatched flexibility and tax advantages, making it a potentially effective vehicle for education savings.
Coverdell Education Savings Accounts (ESAs) share some tax benefits but have low contribution limits and income restrictions, with generally no state tax deductions.
UGMA and UTMA custodial accounts offer investment flexibility but lack tax advantages and control once the child reaches adulthood.
As the holidays approach, parents and grandparents may be looking for meaningful ways to support younger family members. Contributing to an education savings account can be one of the most impactful gifts for the long term. Financial professionals can use this time of year to help clients understand how different account types compare—and why 529 plans continue to stand out.
There are several ways to save for a child’s education, but between them, the differences in tax treatment, flexibility, and control are significant.
A 529 plan offers tax-deferred growth and tax-free withdrawals1 for qualified education expenses, which can include tuition, room and board, books and computers for college, graduate school, and trade programs. Funds can also be used for K–12 expenses (up to $10,000 annually) and up to $10,000 in certain student loan repayments.
There are no income limits for contributors, and plans allow high contribution ceilings—often $500,000 or more per beneficiary depending on the state. In addition, the annual gift tax exclusion ($19,000 per individual or $38,000 for married couples in 2025) and the ability to “superfund” five years’ worth of contributions (up to $95,000 per individual and $190,000 filing jointly) make 529s attractive for wealth transfer and estate planning.
Importantly, funds remain under the control of the account owner, not the beneficiary. If the intended student doesn’t use the money, it can be transferred to another family member or rolled into a Roth IRA (up to $35,000 over time) without federal taxes or penalties, subject to holding and contribution limits.
Like 529 plans, Coverdell ESAs allow earnings to grow tax-free and withdrawals to be made tax-free for qualified education expenses.1 However, their annual contribution limit is just $2,000 per beneficiary, and eligibility phases out for higher-income households (single filers earning above $110,000 and joint filers above $220,000).
Unlike 529s, Coverdell funds must be used before the beneficiary turns 30, or they are subject to taxes and a 10% penalty. These accounts can make sense for families seeking modest savings or additional K–12 coverage but are generally less scalable for long-term college funding.
UGMA and UTMA accounts—short for Uniform Gifts to Minors Act and Uniform Transfers to Minors Act—are custodial investment accounts established for a minor’s benefit. Unlike 529 or Coverdell plans, these are not limited to education expenses; funds can be used for any purpose that benefits the child, though these accounts can be transferred into a 529 account.
However, the earnings are taxable each year, and once the child reaches the age of majority (18 or 21, depending on the state), they gain full control of the assets. This can present planning challenges if the beneficiary decides to spend the money on something other than education. While these accounts provide investment flexibility, they lack the tax-deferred growth and control features of 529 plans.
Recent legislation introduced “Trump Accounts,” which function as starter retirement accounts for children. While uncertainty still surrounds them, these should be thought of as a form of traditional IRA rather than an education savings tool. Contributions are capped at $5,000 per year, and withdrawals are not permitted until age 18, except in limited circumstances. While valuable for long-term saving, they do not offer tax-free withdrawals for education expenses and therefore do not replace 529 plans for college funding.
Amid holiday spending and year-end planning, education savings may not always be top of mind. But for many families, a 529 contribution represents both a thoughtful gift and a potentially sound financial strategy. With flexible use cases, favorable tax treatment and high contribution limits, 529 plans remain a potentially powerful way to invest in a child’s future.
Don’t let misconceptions about 529 plans haunt your clients. With expanded qualified uses these plans are more adaptable than ever.
The FAFSA Simplification Act of 2020 has transformed and streamlined how federal college financial age eligibility is calculated.
Saving for education is one of the most important parts of securing a bright future for your loved ones.
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