 | Summary of Tax-Advantaged College Savings Options
| Federal tax-deferred-growth and tax-free earnings when withdrawals are used for qualified education expenses: |
| 529 Plans |
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529 college savings plan:
You open an individual investment account and direct
your contributions to one or more pre-established
investment portfolios offered by the plan. Typically, there are fees and expenses associated with opening and/or maintaining a college savings plan account (e.g., annual maintenance fee, administrative fees, and investment expenses based on a percentage of total account value).
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529 prepaid tuition
plan:
You prepay college tuition now at a participating
college for use by your child in the future. Your
contributions are pooled into the plan's general
investment fund, and you are generally guaranteed a
certain rate of return (or a certain amount of
tuition). Typically, there are enrollment and administrative fees associated with opening and/or maintaining a prepaid tuition plan account.
State tax benefits may also apply for those who invest in the state plan where they reside.
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| Coverdell Education Savings
Account (ESA)* |
| Allows saving for elementary and secondary school (K-12), as well
as college. You establish an individual investment
account and select the underlying investments for your
contributions (i.e., stocks, mutual funds). Depending on the financial institution, there may be fees associated with opening and/or maintaining a Coverdell ESA.
Income limits restrict who can open an account, and
the maximum contribution allowed per year is $2,000. State tax benefits may also apply. |
| U.S. Savings Bonds (Series EE
and Series I) |
| For the bond's earnings to be exempt from federal
income tax, you must meet income limits in the year you
redeem the bond (the proceeds are added to your income
for this determination). The earnings on federal savings
bonds are always exempt from state income tax. Typically, there are no fees and expenses, except for the possibility of brokerage fees if the bonds are purchased through a broker. |
| Earnings taxed at the child's tax
rate, but no special treatment for withdrawals to pay
education expenses: |
| Custodial Accounts |
| Uniform Gifts to Minors Act (UGMA) and Uniform
Transfers to Minors Act (UTMA) custodial accounts are
established for the benefit of a minor child and managed
by you or another custodian you designate. The exact type
of property that can be held in the account, although
generally quite broad, depends on whether your state has
enacted UGMA or UTMA. Depending on the financial institution, there may be fees associated with opening and/or maintaining a custodial account.
Assets transferred to the account are irrevocable
gifts to the child, and withdrawals can be used only for
the child's benefit. When the child reaches age 18 or 21
(depending on state law), the custodianship ends and the
child receives full control of the remaining assets.
Earnings are taxed each year at the child's tax rate,
but children under 19 years old and full-time students under age 24 (who do not earn more than one-half of their support) are taxed at their
parents' tax rate on any earnings over a certain amount according
to the kiddie tax rules. |
Investors should consider the investment objectives, risks, charges and expenses associated with 529 plans carefully before investing. More information about 529 plans is available in the issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
The availability of the tax or other benefits mentioned above may be conditioned on meeting certain requirements.
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