Saving for College

College Savings Vehicles Compared

	529 Plan	Coverdell ESA	U.S. Savings Bonds	Custodial Account
Participation restrictions	No, though state-run prepaid tuition plans are generally limited to state residents	Yes, income limit for contributions and $2,000 maximum annual contribution per child	No, but ability to exclude bond proceeds from federal income tax depends on income	No
Control of underlying investments	No	Yes	Yes	Yes
Federal tax-free withdrawals if funds used for qualified education expenses	Yes (withdrawals may also be exempt from state income tax, depending on state law)	Yes (withdrawals may also be exempt from state income tax, depending on state law)	Yes, but income limits and other requirements must be met (bond proceeds are also generally exempt from state income tax)	No, taxed according to kiddie tax rules
Penalty if funds not used for qualified education expenses	Yes, a 10% federal penalty applies to the earnings portion of all nonqualified withdrawals (a state penalty may also apply)	Same as 529 plan	No, but the bond proceeds won't be exempt from federal income tax	No, but withdrawals from the account can only be made for the child's benefit
Federal financial aid treatment (student assets are weighed more heavily than parent assets)	Parent asset, if parent or student is account owner, or if 529 plan was funded with custodial account funds	Parent asset, if parent is account owner	Parent asset, if parent is owner of bonds	Student asset
Fees and expenses	529 savings plan: may be an annual administration fee and ongoing investment expenses 529 prepaid tuition plan: may be an enrollment fee and administrative fees	May be fees associated with opening and/or maintaining an account, depending on financial institution	No fees or expenses, except for the possibility of brokerage fees if bonds are purchased through a broker	May be fees associated with opening and/or maintaining an account, depending on financial institution

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; more information is available in each issuer's official statement. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.

The availability of the tax and other benefits mentioned above may be conditioned on meeting certain requirements. U.S. savings bonds are guaranteed by the federal government as to the timely payment of principal and interest. The remaining types of college savings vehicles discussed are not guaranteed (except for 529 prepaid tuition plans) and are more risky.