| College Savings Alternatives: A Comparison | ||||
| Custodial Accounts | 2503(c) Trust | Coverdell Education Savings Account (ESA) | 529 Savings Plans | 529 Prepaid Tuition Plans |
| Description | ||||
|
Account established at a financial institution.
Managed by parent or another designated custodian. |
Trust established for benefit of a minor child.
Can be controlled by a trustee until child reaches 21. |
Savings vehicle allows money to accumulate tax-deferred.
Distributions exempt from federal taxes if used to pay qualified education expenses of beneficiary. Maximum contribution: $2,000 per beneficiary, per year. |
Investment account allows money to accumulate tax-deferred for a child’s college or graduate school education.
Established by a state and managed by a financial institution. |
Plan allows an individual to prepay some or all of a child’s undergraduate college tuition at predetermined prices.
Can be sponsored by a state or private college or university. Contract plans cover predetermined amount; unit plans cover percentage of college costs. |
| Advantages | ||||
|
Assets controlled by the custodian.
Income earned is taxed to the child (but if under 14, kiddie tax rules apply). Account costs tend to be low; no trustee costs. |
Can be created by either a parent or grandparent.
Minor child unable to access the funds prior to 21. Contributions qualify as present interest gifts for gift tax purposes. |
Can be established by parents, grandparents or family friends.
Can be used to cover elementary and secondary school expenses as well as college. Unlimited investment options. Can be rolled over to another ESA for same beneficiary or a family member of beneficiary. |
Professional money management of account assets.
Can be modified or rolled over to a new 529 savings plan once every 12 months without tax or penalty. Account owners can change plan beneficiary if new one is family member of old beneficiary. |
Future college tuition costs locked in at today’s dollars, offering a form of guaranteed return. |
| Disadvantages | ||||
|
No separate tax return required.
Child gains complete access to the account at age 18 or 21 (depending on state). Transfers are irrevocable. |
Contributions are irrevocable.
Trust remains in place until the child reaches 21. Beneficiary designation can’t be changed. Can be costly to establish, including attorney’s fees and annual trustee fees. Trust must file an annual income tax return. Trust may be taxed at higher rate than donor. |
Income limitations on donor: Phaseouts are $95,000–$110,000 for singles; $190,000–$220,000 for married filing joint.
Generally, contributions only for beneficiaries under 18. Any remaining funds must be distributed when beneficiary reaches 30, with earnings taxed as income, plus a 10% tax penalty. |
No guaranteed rate of return.
Earnings on distributions not used for education expenses subject to federal income tax and a 10% penalty, plus possible taxes and penalties. |
Beneficiary must attend plan’s participating colleges in order to receive maximum benefit.
Only covers undergraduate tuition costs. Most plans require all withdrawals be made within 10 years of time beneficiary starts college and by age 30. |
| Impact on Financial Aid | ||||
| Assets included in child’s asset base. | Assets included in child’s asset base. |
Assets included in parent’s asset base.
Qualified distributions not considered income of parent or student. |
Assets included in parent’s asset base.
Qualified distributions not considered income of parent or student. |
Not treated as asset of either parent or child.
Distributions reduce child’s federal financial aid award, dollar for dollar. |