Savings vehicles like 529 Plans offer distinct advantages over traditional checking or savings accounts, namely the opportunity for tax-free earnings. Here is how 529 Plans compare to other college savings vehicles.
| 529 Plans | Coverdell Education Savings Accounts | Qualifying U.S. Savings Bonds | UGMA/UTMA | |
| Federal Income Tax | Contributions made with after-tax funds; earnings excluded from income for federal tax purposes when used for qualified college expenses | Contributions made with after-tax funds; earnings excluded from income for federal tax purposes when used for qualified college and K-12 expenses | Certain “EE” and “I” bonds may be redeemed tax-free for college expenses | First $1,050 is tax-exempt; unearned income over $2,100 for certain children under age 24 is taxed at parent rate |
| Federal Gift Tax Treatment | Contributions treated as gifts; annual and 5-yr… federal exclusions apply | Contributions treated as gifts; annual federal exclusions apply | Not considered a gift | Contributions treated as gifts; annual federal exclusions apply |
| Federal Estate Tax Treatment | Value excluded from contributor’s estate; included for death during 5-yr.. election period | Value excluded from contributor’s estate | Value included in owner’s estate | Value excluded from contributor’s estate |
| Maximum Investment | $418,000 per Beneficiary in Florida | $2,000 per Beneficiary per year (all sources) | $10,000 face value per year, per owner, per type of bond | No limit |
| Qualified Expenses | Tuition, fees, books, computers and related equipment, supplies, special needs; room and board for minimum half-time students | Tuition, fees, books, supplies, equipment, special needs; room and board for minimum half-time students; additional categories of K-12 expenses | Tuition and fees | No restrictions |
| Change Beneficiary | Yes (member of family) |
Yes (member of family) |
Not applicable | Prohibited |
| Time/Age Restrictions | Prepaid: Enroll before 11th grade, 10-yr.. benefit period Savings: None |
Contributions before Beneficiary reaches age 18; use of account by age 30 | Bond purchaser must be at least 24 years old at time of bond issuance | Custodianship terminates when minor becomes adult |
| Income Restrictions | None | Contributions limited for incomes approx. $100K and above | Interest exclusion for incomes approx. $77K and below | None |
| Federal Financial Aid | Asset of parent if owner is parent or dependent student | Asset of parent if owner is parent or dependent student | Counted as asset of bond owner | Counted as asset of the student |
| Use for Non-Qualifying Expenses | Withdrawn earnings subject to federal tax and 10% penalty | Withdrawn earnings subject to federal tax and 10% penalty | No penalty; interest on redeemed bonds included as income | Funds must be used for benefit of the minor |
For specific information about your situation and options, please consult an investment adviser or certified public accountant.
