Key Takeaways
- 529 plans offer unlimited contributions (up to state aggregate limits of $235,000-$550,000) with tax-free growth for qualified education expenses
- Coverdell ESAs allow $2,000 annual contributions per beneficiary with income phaseouts ($95,000-$110,000 single; $190,000-$220,000 MFJ)
- UGMA/UTMA custodial accounts become the child's property at majority and are assessed at 20% for financial aid
- Series EE/I bonds provide tax-free interest for education with 2025 income limits of $99,500-$114,500 single ($149,250-$179,250 MFJ)
Education Savings Vehicles
Choosing the right education savings vehicle is critical for maximizing tax benefits while preserving financial aid eligibility. Each option has unique advantages, limitations, and appropriate use cases.
Overview of Education Savings Options
Comparison Table: Key Features
| Feature | 529 Plan | Coverdell ESA | UGMA/UTMA | EE/I Bonds |
|---|---|---|---|---|
| Annual Limit | No federal limit | $2,000/beneficiary | No limit | $10,000/year each |
| Aggregate Limit | $235,000-$550,000 by state | None specified | None | None |
| Income Limits | None | Single: $110,000; MFJ: $220,000 | None | Single: $114,500; MFJ: $179,250 (2025) |
| Tax Treatment | Tax-free for qualified expenses | Tax-free for qualified expenses | Kiddie tax may apply | Tax-free for education |
| Control | Account owner | Custodian | Custodian until majority | Owner |
| Financial Aid | Parent asset (5.64%) | Parent asset (5.64%) | Student asset (20%) | Parent asset |
| Age Limits | None | Contributions before 18; use by 30 | Until majority | Owner must be 24+ at purchase |
529 Plans (Qualified Tuition Programs)
529 plans are the most popular and flexible education savings vehicle, offering significant tax advantages and high contribution limits.
Types of 529 Plans
Savings Plans: Invest in mutual funds or similar investments. Account value fluctuates with market performance. Can be used at any accredited institution nationwide.
Prepaid Tuition Plans: Lock in current tuition rates at participating schools. Limited to specific state schools in most cases. May not cover room and board.
Key 529 Plan Features (2025-2026)
| Feature | Details |
|---|---|
| Contribution Limit | No annual federal limit; state aggregate limits $235,000-$550,000+ |
| Gift Tax Treatment | Contributions qualify for annual exclusion ($19,000/person in 2025-2026) |
| Superfunding | Up to $95,000 single/$190,000 married can be contributed in one year |
| State Tax Deduction | Many states offer deductions for contributions to their state plan |
Qualified 529 Expenses
- Tuition and fees at eligible institutions
- Books, supplies, and required equipment
- Room and board (if enrolled at least half-time)
- Computer equipment, software, and internet access
- K-12 tuition (up to $10,000 per year; increasing to $20,000 in 2026)
- Student loan repayment (lifetime limit of $10,000 per beneficiary)
- Registered apprenticeship programs
Coverdell Education Savings Accounts (ESAs)
Coverdell ESA Contribution Rules (2025)
| Requirement | Details |
|---|---|
| Annual Limit | $2,000 per beneficiary per year (total from all contributors) |
| Income Phaseout (Single) | Reduced $95,000-$110,000; ineligible above $110,000 |
| Income Phaseout (MFJ) | Reduced $190,000-$220,000; ineligible above $220,000 |
| Contribution Deadline | April 15 of following year (same as tax return) |
| Beneficiary Age | Must contribute before beneficiary turns 18 |
| Use-By Age | Funds must be used by beneficiary's 30th birthday |
Coverdell Advantages Over 529s
- Broader qualified expenses - Elementary and secondary school expenses fully covered
- Investment flexibility - Can invest in individual stocks, bonds, or any security
- No state restrictions - Same rules apply regardless of state
Coverdell Limitations
- Low contribution limit - Only $2,000 per year limits accumulation potential
- Income restrictions - High earners cannot contribute directly
- Age restrictions - Must contribute before 18 and use by age 30
- Workaround: Entities (corporations, trusts) can contribute regardless of income
UGMA/UTMA Custodial Accounts
UGMA vs. UTMA Differences
| Feature | UGMA | UTMA |
|---|---|---|
| Asset Types | Cash, securities, insurance | All asset types including real estate |
| Transfer Age | 18 or 21 (varies by state) | 18-25 (varies by state) |
Key UGMA/UTMA Characteristics
Ownership: Assets are irrevocably gifted to the child. Child gains full control at age of majority (18-21). Cannot change beneficiary. Child can use funds for ANY purpose.
Tax Treatment: Income taxed at child's rate, subject to kiddie tax. First $1,350 of unearned income: tax-free (2025-2026). Next $1,350: taxed at child's rate. Above $2,700: taxed at parent's rate.
Financial Aid Impact: Counted as student asset at 20% assessment rate. Significantly more harmful to aid eligibility than parent-owned 529. $10,000 in UTMA reduces aid eligibility by $2,000.
Series EE and I Savings Bonds
Education Savings Bond Program Requirements
| Requirement | Details |
|---|---|
| Bond Types | Series EE or Series I bonds only |
| Issue Date | Must be issued after 1989 |
| Owner Age | Owner must be 24+ at time of purchase |
| Registration | Must be in parent's name (NOT child's name) |
| Redemption | Must redeem in same year as education expenses |
| Expenses | Tuition and fees only (not room, board, or books) |
2025 Income Limits for Tax Exclusion
| Filing Status | Full Exclusion | Phase-Out Range | No Exclusion |
|---|---|---|---|
| Single/HOH | Up to $99,500 | $99,500-$114,500 | Above $114,500 |
| MFJ | Up to $149,250 | $149,250-$179,250 | Above $179,250 |
| MFS | N/A | N/A | Not eligible |
2026 Income Limits (Inflation Adjusted)
| Filing Status | Full Exclusion | Phase-Out Range | No Exclusion |
|---|---|---|---|
| Single/HOH | Up to $101,800 | $101,800-$116,800 | Above $116,800 |
| MFJ | Up to $152,650 | $152,650-$182,650 | Above $182,650 |
CFP Exam Tip: Know the key differences between vehicles, especially contribution limits, income restrictions, qualified expenses, and financial aid treatment.
Which education savings vehicle has an income phaseout that limits who can contribute?
A grandparent wants to purchase savings bonds for a grandchild's education. To qualify for the education tax exclusion, the bonds must be:
Regarding financial aid treatment, how are UGMA/UTMA accounts assessed compared to 529 plans owned by parents?