Savings Options

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529 College Savings Plans

• Earnings can be exempt from federal income taxes for qualified distributions.
• Funds can be used for all qualified higher education costs, including tuition, fees, room and board, books, equipment and supplies.
• Investment results vary. You may gain or lose investment value. With this added risk comes the opportunity for earning greater returns.

• Provide federal income tax-free earnings when used for qualified higher education expenses.
• Generally minimal effect on financial aid eligibility.
• Anyone can generally contribute, regardless of residency or income.
• Flexible beneficiary options with no age restrictions.
• Relatively large contributions permitted.
• Easy to rollover to another 529 plan.

• 10 percent penalty on investment earnings plus federal income taxes if funds are not used for qualified higher education expenses.
• Limited investment options.
• Investment value is subject to loss or gain.
• No lock on tuition rates.

Coverdell Education Savings Accounts

• Formerly known as Education IRAs.
• Allow annual contributions up to $2,000 per beneficiary.
• Funds can be used for qualified elementary, secondary or college expenses, including tuition, room and board, books, equipment and supplies.
• Earnings can be exempt from federal income taxes for qualified distributions.

• Provide federal income tax-free earnings when used for qualified education expenses.
• Flexible investment options.
• Flexible beneficiary options.
• Generally low effect on financial aid eligibility.

• Gifts are irrevocable.
• 10 percent penalty on investment earnings plus federal income taxes if funds are not used for qualified education expenses.
• Contributions limited to $2,000 annually, per beneficiary.
• Families with high income may not qualify.

Custodial Accounts (UTMA / UGMA)

• Allow parents, grandparents and others to contribute an irrevocable gift to a minor child.
• Accounts are established in the child’s name and earnings are taxed based on the child’s age.

• Not subject to tax because of UTMA/UGMA distributions.
• Parents control the account until the child is of age (generally 18 or 21) according to state law.
• Funds may be used for any purpose.

• Gifts are irrevocable.
• No beneficiary changes.
• Money is considered the child’s property and affects financial aid eligibility.

Prepaid Tuition Plans

• Allow parents, grandparents and others to lock in current tuition rates.
• Participants purchase units of tuition (years, semesters or credits) at current costs for state colleges or universities and use them to pay for future college costs.

• Anyone can contribute, regardless of income.
• With most plans, proceeds may be transferred to another family member.
• Plans are guaranteed by state governments.

• 10 percent penalty on investment earnings plus federal income taxes if funds are not used for qualified higher education expenses.
• Room and board, books, equipment and supplies generally are not covered.
• Most plans cover only in-state tuition.
• Accumulated funds can reduce a family’s financial aid eligibility.
• Limited enrollment periods during each year.

Parents’ Investment Account(s)

• Dividends, interest and capital gains are taxed to the owner at applicable federal tax rates. Funds can be withdrawn for any use.

• No contribution limits.
• Minimal effect on financial aid eligibility.
• Parents control how the account is invested and used.
• No income or age limitations.

• All interest, dividends, and gains are taxed for federal income tax purposes at the parents’ tax rate.
• Accounts remain in the parents’ estate if registered to parents.

Ask Others To Contribute

With large financial gifts, relatives can increase your college savings while managing their estates.

• An individual can annually give up to $12,000 to another individual without gift tax consequences.
• Husbands and wives filing jointly may annually give up to $24,000 to another individual without gift tax consequences.

Because estate law is complex, you should seek the advice of an attorney or estate planner specializing in taxes and estate planning regarding your specific situation.

*Parents may use savings bonds to help fund their child's college costs. To receive proceeds federal income tax free, the savings bonds must be owned by the parents, proceeds must be used for qualified college expenses and the savings bond must be redeemed in the year the college expense is incurred.