Earnings are federal tax-free if used for the child's qualified
higher education expenses.
Earnings are tax-free if used for the child's qualified education
expenses.
A portion of earnings are tax-free. Another portion may be
taxable at the child's rate, which is usually lower than an adult's.
Earnings are generally taxable at the adult's rate.
Restrictions on using the money
Withdrawals must be used for qualified higher-education expenses
or earnings are taxed and may be subject to a 10% additional federal tax.
Withdrawals must be used for qualified education expenses
or earnings are taxed and may be subject to a 10% additional federal tax.
Withdrawals can pay for higher education, but also may be made for non-educational needs of the child.
Withdrawals can be made for any purpose.
Who controls the account?
Responsible individual maintains control of the account until all assets are distributed.
Responsible individual maintains control of the account until all assets are distributed.
Child may assume control of the account once the custodianship terminates.
Adult maintains control of the account.
Impact on financial aid
Does not limit use of Hope Scholarship Credit or Lifetime Learning Credit. The account is considered an asset of the account owner for financial aid; therefore, the student may qualify for more financial aid.
May reduce financial aid available to the child.
May reduce financial aid available to the child.
A parent's assets carry less weight in the calculation of financial need; therefore, the student may qualify for more financial aid with this option.
Next Steps
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