Education Savings Plans
Education savings plans provide tax-advantaged ways to save for education expenses. Series 7 representatives should understand these options to help clients plan for education costs.
529 Plans (Qualified Tuition Programs)
529 plans are state-sponsored investment accounts designed for education savings.
Types of 529 Plans
| Type | Description |
|---|---|
| 529 Savings Plans | Investment accounts that grow tax-free |
| 529 Prepaid Tuition | Lock in current tuition rates at specific schools |
Most discussions focus on 529 savings plans, which are far more popular.
529 Plan Tax Benefits
| Benefit | Description |
|---|---|
| Growth | Tax-free federally |
| Qualified Withdrawals | Tax-free for education expenses |
| State Benefits | Many states offer deductions for contributions |
| Gift Tax Treatment | Contributions qualify for annual exclusion |
529 Contribution Rules
| Rule | Detail |
|---|---|
| No Federal Limit | States set their own limits (typically $300,000-$500,000+) |
| Gift Tax Exclusion | $19,000 per beneficiary (2025) |
| Superfunding | Up to 5 years of gifts at once ($95,000 individual / $190,000 married) |
| No Income Limits | Anyone can contribute regardless of income |
| No Age Limits | No age restrictions on beneficiaries |
Qualified Education Expenses (529)
Tax-free withdrawals can be used for:
| Expense | Coverage |
|---|---|
| Tuition and Fees | College, vocational, K-12 (up to $10,000/year) |
| Room and Board | If enrolled at least half-time |
| Books and Supplies | Required for enrollment |
| Computers | Including internet access |
| Special Needs | Services for special needs beneficiaries |
Non-Qualified Withdrawals
If funds are used for non-qualified expenses:
- Earnings portion taxed as ordinary income
- 10% penalty on earnings
- Principal is never taxed or penalized
529-to-Roth IRA Rollover (SECURE 2.0)
Starting in 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary:
| Rule | Requirement |
|---|---|
| Account Age | 529 must be open 15+ years |
| Contribution Waiting Period | Contributions in last 5 years ineligible |
| Annual Limit | Subject to Roth IRA contribution limits |
| Lifetime Limit | $35,000 maximum rollover |
529 Plan Advantages
- High contribution limits
- No income restrictions
- Tax-free growth
- Flexible—can change beneficiaries
- State tax benefits often available
- Superfunding option for large gifts
Coverdell Education Savings Accounts (ESAs)
Coverdell ESAs are education savings accounts with stricter limits but broader expense coverage.
Coverdell ESA Rules
| Rule | Detail |
|---|---|
| Annual Contribution Limit | $2,000 per beneficiary |
| Income Limits | $110,000 single / $220,000 married (no contribution if exceeded) |
| Contribution Deadline | Tax filing deadline (April 15) |
| Age Limits | No contributions after age 18; must be used by age 30 |
Coverdell Qualified Expenses
Coverdell ESAs cover broader K-12 expenses than 529 plans:
| Expense Type | Covered |
|---|---|
| Tuition | K-12 and higher education |
| Books and Supplies | All levels |
| Tutoring | Academic support services |
| Computer Equipment | Hardware, software, internet |
| Room and Board | Higher education |
| Special Needs Services | All levels |
| Uniforms | K-12 |
529 vs. Coverdell Comparison
| Feature | 529 Plan | Coverdell ESA |
|---|---|---|
| Annual Contribution | No federal limit | $2,000 |
| Income Limits | None | $110K/$220K |
| K-12 Expenses | $10,000 tuition only | Broad coverage |
| Age Limits | None | Contributions end at 18; use by 30 |
| Investment Options | Plan's menu | Self-directed |
| State Tax Benefits | Often available | Generally none |
Key Point: Many families use 529 plans for their higher limits and flexibility, reserving Coverdell for K-12 non-tuition expenses.
ABLE Accounts
ABLE accounts (Achieving a Better Life Experience) help individuals with disabilities save without affecting government benefits.
ABLE Account Features
| Feature | Detail |
|---|---|
| Eligibility | Disability onset before age 26 |
| Annual Contribution | Same as gift tax exclusion ($19,000 in 2025) |
| Benefit Protection | First $100,000 doesn't affect SSI |
| Qualified Expenses | Disability-related expenses |
ABLE Qualified Expenses
- Education
- Housing
- Transportation
- Health and wellness
- Assistive technology
- Personal support services
Impact on Financial Aid
Education savings can affect financial aid eligibility:
| Asset Type | FAFSA Treatment |
|---|---|
| 529 (Parent-Owned) | Counted as parent asset (5.64% max) |
| 529 (Student-Owned) | Counted as parent asset if dependent |
| 529 (Grandparent-Owned) | Not reported as asset; distributions count as income |
| Coverdell | Same as 529 |
| UTMA/UGMA | Student asset (20% assessment rate) |
Strategy: Parent-owned 529 plans have the most favorable financial aid treatment.
On the Exam
The Series 7 exam frequently tests:
- Contribution limits (529 vs. Coverdell)
- Income restrictions for Coverdell
- Qualified expense differences
- Tax treatment of qualified vs. non-qualified withdrawals
- 529 superfunding rules
What is the maximum annual contribution to a Coverdell Education Savings Account?
A married couple wants to "superfund" a 529 plan for their grandchild. What is the maximum they can contribute at once using the 5-year gift tax averaging election in 2025?
Which of the following is a qualified expense for BOTH 529 plans AND Coverdell ESAs?
A parent withdraws $15,000 from a 529 plan. $10,000 represents contributions and $5,000 represents earnings. The funds are used to buy a car. What is taxable?
Which education savings option has income limits that prevent high-earning families from contributing?
10.5 Plan Distributions and Taxation
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