Education Savings Plans
Tax-advantaged accounts help families save for education expenses. Understanding 529 plans and Coverdell ESAs is essential for comprehensive financial planning.
529 Plans
Types of 529 Plans
| Type | Description |
|---|---|
| Savings Plans | Investment accounts with market-based growth; most common |
| Prepaid Tuition Plans | Lock in current tuition rates at specific schools; less common |
Tax Treatment
| Phase | Federal Tax Treatment |
|---|---|
| Contributions | NOT federally deductible (some states offer deductions) |
| Growth | Tax-deferred |
| Qualified Withdrawals | TAX-FREE |
| Non-Qualified Withdrawals | Earnings taxed + 10% penalty |
2025 Contribution Rules
| Feature | 2025 Limit/Rule |
|---|---|
| Federal Contribution Limit | No federal limit |
| State Limits | Vary by state ($235,000 - $575,000 total) |
| Gift Tax Exclusion | $19,000 per donor, per beneficiary |
| Superfunding (5-year averaging) | $95,000 single / $190,000 married (5 × $19,000) |
Superfunding (Gift Tax Averaging)
You can contribute up to 5 years' worth of annual exclusion gifts at once:
- Single: $95,000 ($19,000 × 5)
- Married Couple: $190,000 ($38,000 × 5)
Rules:
- No additional gifts to same beneficiary for 5 years
- Must report on Form 709 as series of gifts
- If donor dies within 5 years, portion included in estate
Qualified Education Expenses
| Expense Type | Covered? |
|---|---|
| Tuition and fees | Yes |
| Books and supplies | Yes |
| Room and board (at least half-time enrollment) | Yes |
| Computer and technology | Yes |
| K-12 tuition | Yes (up to $10,000/year) |
| Student loan repayment | Yes (up to $10,000 lifetime) |
| Apprenticeship programs | Yes |
529 to Roth IRA Rollover (SECURE 2.0)
Starting in 2024, unused 529 funds can roll to a Roth IRA:
| Requirement | Rule |
|---|---|
| Account Age | Must be open at least 15 years |
| Contribution Age | Contributions in last 5 years not eligible |
| Annual Limit | Subject to Roth IRA annual limit ($7,000 in 2025) |
| Lifetime Limit | $35,000 per beneficiary |
| Beneficiary | Roth IRA must be owned by 529 beneficiary |
| Earned Income | Beneficiary must have earned income ≥ rollover amount |
Example: If 529 has been open 15+ years with $50,000 unused, the beneficiary can roll over $7,000/year to their Roth IRA until reaching the $35,000 lifetime limit (about 5 years).
Key 529 Features
| Feature | Description |
|---|---|
| Owner Control | Account owner controls the money (not beneficiary) |
| Beneficiary Change | Can change to family member without penalty |
| No Income Limits | Anyone can contribute regardless of income |
| Financial Aid | Parental asset (5.64% assessed) vs. student asset (20%) |
Coverdell Education Savings Accounts (ESAs)
Contribution Rules
| Feature | 2025 Rule |
|---|---|
| Annual Limit | $2,000 per beneficiary |
| Contribution Deadline | Tax filing deadline |
| Age Limit | Must contribute before beneficiary turns 18 |
| Use Deadline | Must be used by age 30 |
Income Limits (2025)
| Filing Status | Full Contribution | Phase-Out Begins | No Contribution |
|---|---|---|---|
| Single | MAGI < $95,000 | $95,000 | > $110,000 |
| Married Filing Jointly | MAGI < $190,000 | $190,000 | > $220,000 |
Qualified Expenses
Broader than 529 for K-12:
- Tuition, fees, books, supplies, equipment
- Room and board
- Tutoring, special needs services
- Uniforms, transportation
- Computer technology and internet access
Coverdell Key Features
- Tax-free growth and withdrawals for qualified expenses
- More flexible K-12 expense coverage than 529
- Lower contribution limits ($2,000 vs. unlimited for 529)
- Income limits apply (unlike 529)
529 vs. Coverdell Comparison
| Feature | 529 Plan | Coverdell ESA |
|---|---|---|
| Contribution Limit | No federal limit | $2,000/year |
| Income Limits | None | Yes (phases out) |
| K-12 Expenses | Tuition only ($10,000/year) | All qualified expenses |
| Higher Education | Full qualified expenses | Full qualified expenses |
| Age Limit | None | Contribute by 18, use by 30 |
| Control | Owner | Owner |
| Roth Rollover | Yes (up to $35,000) | No |
In Practice
When recommending education savings:
- 529 is generally preferred for higher contribution limits and no income restrictions
- Coverdell may supplement 529 for K-12 non-tuition expenses
- Consider state tax deductions for in-state 529 contributions
- Superfunding allows significant front-loading for grandparents
- 529 to Roth rollover provides escape valve for unused funds
On the Exam
Series 65 frequently tests:
- 529 qualified withdrawal = tax-free
- $19,000 annual gift tax exclusion (2025)
- Superfunding: 5 × annual exclusion
- Coverdell $2,000 annual limit and income restrictions
- 529 to Roth rollover rules (15-year, $35,000 lifetime)
Key Takeaways
- 529 qualified withdrawals are tax-free for education expenses
- 2025 gift tax exclusion: $19,000/year; superfunding: $95,000/$190,000
- Coverdell: $2,000/year limit, income restrictions, broader K-12 coverage
- 529 to Roth rollover: 15-year account age, $35,000 lifetime limit
- 529 beneficiary can be changed to family member
- 529 has no income limits for contributions; Coverdell does
Test Your Knowledge
Qualified withdrawals from a 529 plan are:
A
B
C
D
Test Your Knowledge
Under the 529 to Roth IRA rollover provision, the maximum lifetime amount that can be rolled over is:
A
B
C
D
Test Your Knowledge
The annual contribution limit for a Coverdell Education Savings Account is:
A
B
C
D
Up Next
11.5 Distributions & RMDs
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