Compare education savings plans

ARTICLE TAKEAWAYS

  • Review three popular ways clients can save for education
  • Compare CollegeAmerica®, Coverdell ESA and UGMA/UTMA savings plans
  • Determine which education savings plan is right for your client
CollegeAmerica is a nationwide plan sponsored by Virginia 5 2 9.

Compare the advantages of three popular ways your clients can save for education.

 

CollegeAmerica 529

Coverdell ESA

UGMA/UTMA

Description

A tax-advantaged way to save for qualified education expenses that's easy to manage and has high contribution limits. Learn more.

A tax-advantaged way to save for qualified education expenses with flexible investment options. Learn more.

A way to save for education expenses and take advantage of lower tax rates for children. Learn more.

Who can contribute/Income limit

Anyone can contribute. There are no income limits.

Anyone can contribute. However, the ability to contribute is phased out depending on income. Consult a tax advisor for limits and calculating partial contributions.

Anyone can contribute. There are no income limits.

Contribution limit

$550,000 per beneficiary. Refer to the CollegeAmerica Program Description for additional details.

$2,000 per year per recipient

None

Gift tax considerations

A contribution to a CollegeAmerica account is considered a gift for federal gift and estate tax purposes. Refer to the CollegeAmerica Program Description for additional details.

Money contributed to a Coverdell ESA is exempt from the gift tax, as long as the amount contributed, and other gifts made to the same beneficiary, do not exceed the annual gift tax exclusion. Consult a tax advisor for current limits.

Money contributed to an UGMA/UTMA is exempt from paying a gift tax, up to a certain amount. Consult a tax advisor for current limits.

Contribution deductibility

Contributions are deductible for state income tax for Virginia residents.

For residents of other states, please see our In state or out of state? 529 college savings plan tax guide for more information.

No

No

Uses

Education expenses, such as tuition, room and board and required books and supplies for college and graduate school.

Tuition for elementary or secondary public, private or religious school (up to $10,000).

For information on apprenticeship programs, student loans and more, visit CollegeAmerica qualified education expenses.

Education expenses, such as tuition, room and board and required books and supplies for kindergarten through high school, college and graduate school.

Any expense that benefits the child.

Income tax treatment

Earnings grow free from federal tax.

Distributions used for qualified education expenses are free from federal tax.

If distributions are used for nonqualified expenses, the earnings are subject to:

  • A 10% federal tax penalty

  • Federal income tax

  • State income tax, if applicable

States take different approaches to the income tax treatment of distributions. For example, distributions for K–12 expenses may not be exempt from state tax in certain states.

Earnings grow free from federal tax.

Distributions used for qualified education expenses are free from federal tax.

If distributions are used for nonqualified expenses, the earnings are subject to:

  • A 10% federal tax penalty

  • Federal income tax

  • State income tax, if applicable

For specific guidelines regarding income tax treatment for distributions involving children under 19 or full-time students between the ages of 19 and 24, consult your tax advisor.

Oversight

The owner maintains control of the assets, decides when distributions will be taken and can change the beneficiary.

The recipient may assume control at age of majority in their state of residence (18 or 21 years old in most states).

The beneficiary may assume control at UGMA/UTMA age of majority (18 or 21 years old in most states).

Investment flexibility

Assets can be changed among funds twice per calendar year and when a new beneficiary is selected.

Visit CollegeAmerica strategy changes for additional information.

Assets can be changed among funds, and these exchanges are not considered taxable events.

Assets can be changed among funds, but each exchange is generally a taxable event.

Investment options

Most American Funds, including American Funds College Target Date Series®, in four share classes:

  • 529-A

  • 529-C

  • 529-E

  • 529-F-2

All American Funds, except tax-exempt and tax-advantaged funds, in three share classes:

  • A

  • C

  • F-2

All American Funds, in three share classes:

  • A

  • C

  • F-2

Rollovers

Allowed once every 12 months or when the beneficiary is changed. Learn more.

Allowed once every 12 months.

Not applicable.

Ability to change beneficiaries

Yes

Yes

No

Related content

This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.

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The guidelines and procedures provided in the Account Resource Center may not apply to networked accounts or accounts not directly held by American Funds. The guidelines and procedures provided also apply only to those retirement accounts or Coverdell ESAs invested in American Funds with Capital Bank and Trust Company (CB&T) as custodian. The guidelines and procedures provided in the Account Resource Center do not apply to plans held in our retirement plan solutions — PlanPremier, PlanPremier-TPA or RecordkeeperDirect. Information on the Account Resource Center may change periodically, and previously printed information may not be current. Please refer to capitalgroup.com for the most current information available.

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