Reference Library

Topics include education, estate, insurance, investment, retirement and risk management planning as well as basic tips for budgeting.

Education Planning

Overview

529 Education Savings Plan Coverdell Education Savings Account Custodial Accounts (Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA)
Ownership/Control Account Owner Account Owner until child reaches age of majority. Unless otherwise elected, when designated beneficiary attains the age of majority under state law, they become the account owner. Custodian until child reaches age of majority (18 or 21 in most states). when the child reaches the age of majority the child gains full control of all the assets in the account.
Investment Choices Plan sponsors provide multiple investment options. Any restrictions that apply to an IRA would also apply. No restrictions
Age Limits None

Except for special needs children, no contributions can be made after a child reaches age 18, and withdrawals must be made before beneficiary reaches age 30.

The account must be fully withdrawn or tranferred to another benefitciary by the time the original beneficiary reaches age 30, or else it will be subject to tax and penalties.

Minor child
Expenses Covered Besides Tuition and Fees Qualified elementary and secondary education (K-12) expenses or qualified higher education expenses Qualified elementary and secondary education (K-12) expenses or qualified higher education expenses No restrictions
Contribution Limit Varies from plan to plan. Majority of plans permit total contributions in excess of $250,000 per beneficiary.

Contributor: $2,000 per beneficiary per year;

Beneficiary: $2,000, does not matter how many ESAs are set up.

Can be made up to April 15 of the following year.

No limit

Anyone can contribute up to $15,000 per child each year free of gift-tax consequences ($30,000 for married couples)

Federal Tax Advantages Earnings grow tax-deferred and are tax-free if used for qualified education expenses.

Earnings grow tax-deferred and are tax-free if used for qualified education expenses.

If the money isn't used for Qualified Education Expenses, a portion of the distribution will be includible in the gross income (general basis recovery rules) IRS Publication 970 contains a worksheet for a taxpayer to use to calculate the taxable amount, if any, of a Coverdell ESA distribution.

$1,050 in earnings are tax-free.

For children under age 19 and full-time students under age 24 whose earned income is less than one-half of their support, the first $1,100 of earnings is tax-free. Earnings between $1,100 and $2,200 are taxed at the child’s rate; earnings above $2,200 are taxed using the brackets and rates for estates and trusts.

State Tax Advantages Varies from state to state, but some states provide tax deduction for contributions, tax-free earnings growth and tax-free withdrawals for qualified education expenses. None None
Income Phase-Out None

The ability to contribute is phased out as your adjusted gross income increases from

Single filers:
$95,000 – $110,000

Joint filers:
$190,000 – $220,000

None
Penalties for Non-Qualified Withdrawals Earnings are taxed as ordinary income and may be subject to 10-percent penalty. If not used for qualified education expenses, the earnings portion of the withdrawal will be taxed at the beneficiary's tax rate and subject to a 10% federal penalty.

None

UGMA/UTMA accounts aren’t limited to education expenses. Withdrawals can be used for anything that benefits the beneficiary.