529 College Savings Plan
A 529 Plan is a smart way to save—it provides tax advantages when used to pay for eligible1 college expenses.
Best if you
- Want an easy way to save for college
- Can commit to using the funds for college expenses
- Want your earnings to grow tax free
- Earnings grow free of federal tax and often state tax2
- Withdrawals for qualified college expenses are tax free
- Minimal impact on financial aid if the 529 Plan isn't owned by the student
Not convinced yet?
529 Plans come with unique features that you won't find in any other college savings plan.
Enjoy these additional benefits
- Open your 529 account for anyone—including a child, grandchild, family friend or even yourself.
- Beneficiaries are not restricted to the state that sponsors your 529 Plan.
- Choose a plan from any state—however, there may be incentives to open a 529 Plan from your state of residency.
- Change your beneficiary at any time without suffering negative tax consequences.
- Enjoy the tax advantages regardless of your income—anyone is eligible to open a 529 Plan.
Understand the fine print
- A qualified expense includes tuition, fees, books, room and board, computers and equipment.
- An eligible school is generally any post-secondary institution including colleges, universities and vocational schools that are eligible to participate in student aid administered by the US Department of Education.
- Contributions cannot exceed educational expenses and are not tax deductible.
- If you need to access some or all of the money in your account for non-educational expenses, your earnings will be taxed as ordinary income plus a 10% penalty.
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Which college savings plan is best for me?
To make your decision easier, here are the highlights for the most widely recognized plans.
A popular choice for college savings is a 529 plan. Earnings grow tax-deferred and may be eligible for state tax deductions, there are no minimum contributions and you can make an unlimited number of tax-free withdrawals for educational expenses.
- $350,000 limit per beneficiary
- No minimum contribution
- Contributions can't exceed the beneficiary's needed qualified education expenses
- There may be gift-tax consequences if your contributions, plus any other gifts, exceed $14,000 a year
- You can name anyone as a beneficiary—a relative, friend or even yourself
Although a Roth IRA is mostly thought of for retirement savings, many financial experts recommend them for educational expenses. If you're using the funds to pay for college expenses, you can make withdrawals at any time without paying a tax penalty. Plus, contributions to your Roth IRA grow tax-free and can be used in combination with a 529 plan.
With a Roth IRA, there are annual contribution limits based on your age and income. Visit the IRS website (opens in a new tab) for the current year's contribution limits.
- Flexibility to save for educational expenses and retirement
- Earnings for qualifying education expenses can be withdrawn without the 10% penalty
- Limits on both annual contributions and income
Coverdell Education Savings Account (ESA)
With a Coverdell ESA, you can save up to $2,000 per beneficiary each year until they reach the age of 18, unless they have special needs. However, there are salary caps based on your modified adjusted gross income (MAGI): $110,000 for single filers and $200,000 for married couples filing jointly. Taxpayers with MAGI above $110,000 and $220,000, respectively, can't contribute to a Coverdell ESA.
Learn more about tax benefits for education and how to calculate your MAGI from the IRS Publication 970 (PDF) (opens in a new tab).
- Flexibility to choose your investments, including CDs, savings accounts and brokerage options
- Ability to pay for K-12 educational expenses, not just college
- Smaller annual contribution limits
The bottom line
With costs rising every year, practically everyone needs to save for college. Weigh your options and choose the plan that makes the most sense for your situation.