College savings plans: Is there a right option for your family?

Deciphering the differences among 529s, Coverdells and UGMAs/UTMAs

College savings plans: Is there a right option for your family?

Few things make parents prouder than seeing their child head off to college. At the same time, few things make a parent more anxious than figuring out how to pay for that education. Trust me, as a parent of three, I’ve been on both sides of that equation!

A college savings plan can make a real difference in covering higher education expenses, but with several options to choose from, how can you be sure you’re selecting the right one for your family? Let’s break down the key differences between three of the most popular college savings programs.

529 college savings plans

529 college savings plans are operated by a state or an educational institution. Contributions grow tax-deferred, and withdrawals are tax-free so long as they’re used for qualified expenses, such as tuition, books, computers, and room and board.1 529 plans feature higher contribution limits than some of the other college savings plans out there, and certain lump sum deposits can even be prorated over five years with the federal gift tax exclusion — making them a popular choice with grandparents looking to leave a living legacy to their grandchildren.

Coverdell Education Savings Accounts

Like 529 plans, Coverdell Education Savings Accounts (CESAs) provide a tax-advantaged savings option. Unlike 529s, CESAs are only available to families with incomes below a certain threshold. Another difference between CESAs and 529s is their contribution maximums — a comparatively low $2,000 per year for each beneficiary for CESAs, versus more than $300,000 in lifetime contributions per beneficiary for many 529s. Another difference: CESA withdrawals can be applied to qualified elementary and secondary education expenses, not just higher education costs. Finally, there are age restrictions for contributions and distributions that should be kept in mind. (Learn more at the IRS website and talk to your financial advisor.)

Custodial accounts

Another alternative savings plan is the custodial account, which is opened on behalf of a minor child and managed by the child’s parent or grandparent. All funds in these accounts must be used in accordance with your state’s Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) — hence their names: UGMA and UTMA accounts. There are no maximum investment limits in custodial accounts, and many account owners benefit from the child’s generally lower tax rates. However, unlike with 529s, you can’t change the beneficiary of these plans if your child receives a scholarship or decides not to attend college.

Phew — that’s a lot of information to absorb! To help you make sense of it, I’ve put all the information on in an at-a-glance comparison. Take a look to see each option in detail.

Finding the right plan for your family

As you can see, these different college savings plans feature their own unique benefits — as well as their own rules and restrictions. Selecting the right option for your family takes careful consideration of your children’s college timetables, the amount of financial aid you expect to obtain, the amount of money you’d like to contribute and the possibility that your beneficiary may change her mind down the line. Your financial advisor can help you weigh your options and find the one that works best for your family.

1 Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements, and certain withdrawals are subject to federal, state and local taxes. Invesco Distributors, Inc. nor any of its applicable affiliates, provide legal or tax advice. This information is provided for general educational purposes only and is not to be considered legal or tax advice. Investors should consult with their legal or tax advisors for personalized assistance, including information regarding any specific state law requirements.

Important information

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Thomas Rowley

Director, Retirement and Education Strategies

Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at in addition to his speaking engagements.

Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.

Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.

Mr. Rowley has been director of retirement business strategy since 2010. Prior to joining Invesco in 2010, he was in charge of individual retirement plan products and Retirement Marketing at Van Kampen.

Prior to joining Van Kampen in 1996, he was a 401(k) regional sales director with an investment firm. His experience also includes seven years in retirement plan operations and three years as head of a brokerage firm’s retirement help desk. He began his career in the Treasury bond futures pit at the Chicago Board of Trade.

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