Do you have children or grandchildren to whom you want
to give a helping hand with education expenses? With so
many other expenses to think about, it's easy to overlook
the importance of planning ahead. But with college costs
skyrocketing, it's important to start investing early to take
advantage of the power of compounding and potential
When it comes to funding education expenses, investors
have a number of options. Here are two of them:
529 college savings plans and Coverdell Education Savings
Accounts (ESAs). Which account you select can make a
significant difference, so compare these options carefully
before choosing. Use the chart below to
help you decide which works best for you.
Choose the college planning option
that's right for you.
Annual Contribution Limits
|Contributions can be
made by anyone, and
there are no family
||Earnings grow federal tax-deferred and
are tax-free if used for qualified education
Some states provide state income
tax deductions or matching grants
Plans can be transferred to another family
member without penalty.
Account owner retains control of how
the money is used, and there's no age
restriction for use.
||State income tax
deductions apply for
residents of certain states;
deductible limits vary.
||10% additional penalty tax on earnings for
|Contributions may be
made by any taxpayer
provided their adjusted
gross income is less
than $110,000 (single)
or $220,000 (joint).
||Earnings grow federal tax-deferred
and are federal tax-free if used for
qualified education expenses.
May be used for elementary and
secondary school expenses.
Can transfer account to another student.
May choose from a variety of investment
options, including stocks, bonds, and
|$2,000 maximum annual
contribution per child, up
to age 18.
||Can only contribute until child is 18 years
old. The beneficiary must withdraw unused
assets before age 30, or they will be subject
to taxes and penalties.
10% penalty for nonqualified withdrawals.
Which plan works best for you? Here are a few things to consider.
529 plans have higher contribution limits,
which may make them a better alternative
when investing for high education costs.
529 plan contribution limits vary by state
but are often as high as $330,000 in total
(no annual limit). With rising college costs,
this becomes an important factor.
529 plans have low account-opening minimums, some as little as $15 if you sign up for an
automatic investment plan, versus higher
investment minimums for ESAs.
Flexibility of Use
529 plans can only be used to pay for
college and vocational schools.
ESAs can be used for college, elementary
school, or high school making them
a tax-advantaged way to invest for
You can contribute to both ESAs and 529 plans
simultaneously to invest for private
elementary or secondary schools, as well
A program of regular investment cannot assure a profit or protect against a loss in a declining market. Because such a program involves continuous investments regardless of fluctuating share values, investors should consider their financial ability to continue purchases through periods of low price levels.
Maximizing Investment Income