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Compare your education savings options

Deciding how to save for your child’s education can feel complicated. There are many types of savings accounts and investment plans, and each has its own pros and cons.

Take a look at our comparison table to help you make the right choice for your family. In most cases, “qualified education expenses” generally include tuition, fees, room and board, computers and software, textbooks, and other education-related supplies.

Key takeaways

  • A CollegeAmerica® 529 education savings plan, Coverdell Education Savings Account (ESA) and UGMA/UTMA (Uniform Gifts/Transfers to Minors Act) are three popular ways to save for education.
  • There are advantages and disadvantages to consider, including tax benefits, qualified expense withdrawals and who controls the account.
  • As account owner, you control the account and how the money is spent in a 529 savings plan.

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Logo. CollegeAmerica is a nationwide plan sponsored by Commonwealth Savers
 

CollegeAmerica 529 savings plan

Coverdell ESA

UGMA/UTMA account

Why it’s popular

Parents who want to keep control of the account and save money for their child’s college tuition and expenses and/or K-12 tuition can take advantage of federal and possible state tax benefits. Tax-advantaged treatment applies to savings used for qualified education expenses. State tax treatment varies.

Parents who want to save money for their child’s education and expenses from kindergarten through college can take advantage of federal tax benefits. Generally, the funds must be used for qualified education expenses by the time the child is 30.

Parents who don’t want to be limited to saving for education can take advantage of a lower tax rate on a portion of the earnings and allow their child to take control of the funds once he or she reaches adulthood.

Impact on taxes

 

CollegeAmerica 529 savings plan

Coverdell ESA

UGMA/UTMA account

Can I deduct my contribution from my state taxes?

Yes, if you live in Virginia.

No

No

Am I taxed on the earnings in my account?

No

No

There is a limited tax benefit under the parents' tax rate.
An initial amount of UGMA/UTMA earnings remain untaxed or taxed at a very low rate, but all remaining earnings are taxed at the parents’ highest marginal rate.

Am I taxed on my withdrawals if they’re for qualified education expenses?

No

No

Yes

Am I taxed on my withdrawals if they’re not for qualified education expenses?

Yes, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.

Yes, taxable and possible 10% penalty.

Yes, at usual tax rate.

Important rules

 

CollegeAmerica 529 savings plan

Coverdell ESA

UGMA/UTMA account

Is there a limit on my income that affects my ability to contribute?

No

Yes, your ability to contribute is phased out as your adjusted gross income increases.

No

Is there a limit on the total amount of contributions and earnings for the account?

There's no annual limit on contributions. However, once the total account value (including any earnings) reaches $550,000, no additional contributions can be made.

The maximum annual contribution is $2,000 per year per beneficiary from all sources.

No

Can I make qualified withdrawals for higher education tuition and expenses, which include books, meal plans and housing?

Yes. You can also make qualified withdrawals for certain apprenticeship programs and can receive a lifetime allowance of up to $10,000 to pay off student loan debt. Qualified education expenses include expenses for fees, books, supplies and equipment required for the participation of a designated beneficiary in certain apprenticeship programs.

Yes

N/A — this account is not education-specific.

Can I make qualified withdrawals for K-12 tuition and expenses?

Yes, only for tuition, which is limited to $10,000 per student per year. (Not all states consider this use of assets as qualified expenses; state tax treatment varies.)

Yes

N/A — this account is not education-specific.

Can I make qualified withdrawals for non-education expenses?

No

No

N/A — this account is not education-specific.

What is the impact on my child’s ability to receive financial aid?

Limited, depending on who is the owner of the account.
Money in a 529 savings plan that is owned by the parent is considered a parental asset and is factored into the Expected Family Contribution (EFC) determination at a lower percentage. Only 5.64% of this savings is counted against financial aid, which can make qualifying for financial aid easier.

Limited, depending on who is the owner of the account.
If the money in a Coverdell ESA is owned by a parent, then 5.64% of the account value is counted against financial aid.

Significant. Money in an UGMA or UTMA is considered an asset of the student and is factored into the EFC determination at a higher percentage. This designation can work against your family when your child applies for financial aid.

Who controls the money in the account?

Account owner (often a parent or grandparent) maintains control.

Beneficiary, or the person the account is for (usually a minor), gains control at age 30.

Beneficiary gains control at the age of majority, usually 18 or 21, depending on state.

Is there an age limit for the beneficiary?

No, it can be opened for a person of any age.

Yes, when the account is established, the beneficiary must be under age 18 or a special needs beneficiary.  Additionally, the fund must generally be used by the time the beneficiary reaches age 30.

Yes, when the beneficiary reaches the age of majority, usually 18 or 21, depending on state.

Can I change the beneficiary of the account?

Yes

Yes

No

Investment choices

 

CollegeAmerica 529 savings plan

Coverdell ESA

UGMA/UTMA account

Do I have a wide choice of how I invest my money in the account?

Yes

Yes

Yes

Can I change the way my money is invested in the account?

Yes, up to twice a year.

Yes, unlimited.

Yes, unlimited.

Am I able to invest in the American Funds College Target Date Series®?

Yes

No

No

Ready to create a detailed plan?

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Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. Similar information is contained in the CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. CollegeAmerica is distributed by Capital Client Group, Inc., and sold through unaffiliated intermediaries.
Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits, such as financial aid, scholarship funds and protection from creditors, not available through CollegeAmerica. Before investing in any state's 529 plan, investors should consult a tax advisor. CollegeAmerica is a nationwide plan sponsored by Commonwealth Savers. 
Investment professionals gradually adjust a college target date portfolio over time so that it becomes more preservation-oriented. The target date is the year that corresponds roughly to the year in which the beneficiary is expected to begin taking withdrawals. The allocation strategy does not guarantee that investors' education savings goals will be met. Investors and their financial professionals should periodically evaluate their investment to determine whether it continues to meet their needs.
This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only.
Capital Client Group, Inc.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.