Why do you recommend saving with a 529 plan? How does it compare to other options, such as UGMA/UTMA, Coverdell, and savings bonds?


529 Plan

A 529 savings plan is a tax-advantaged investment vehicle designed to encourage saving for future education expenses.

Money that you put in a 529 plan is invested and grows tax-free and can be withdrawn tax-free when used to pay for eligible education expenses. That means that if an investment in your 529 plan account grows in value and you sell that investment for a profit and use it to pay for qualified expenses, there will be no capital gains or income tax on those earnings. This is unlike a regular brokerage or investment account, where you would pay a capital gains tax on any growth that you would see in the account. Qualified expenses include tuition, fees, and room and board at eligible institutions (including at accredited colleges, universities, and vocational or technical schools), as well as other education-related expenses (such as books and computers). As 529 plans have become more popular, Congress has been expanding the ways you can use a 529 plan, and they now include paying for apprenticeship expenses, payments on students loans, and for tuition at a private, religious, or public primary and secondary school (K-12). 

When you create a 529 plan account, you will have the opportunity to choose an investment portfolio that fits the age of your child and your risk tolerance. We recommend an age-adjusting portfolio that automatically adjusts the investment strategy based on the age of your child. If you're starting early and your child is still young, your investment portfolio strategy will be more aggressive (for example, investing more in equities than fixed income). As your child gets older and closer to starting college, your investment portfolio will shift to be more conservative (for example, investing more in fixed income, U.S. Treasuries, or cash).

There are no income-level restrictions with a 529 plan, and anyone (parents, grandparents, relatives, or friends) can open and fund a 529 plan account. You can even open up a 529 account and designate yourself as the beneficiary to pay for your future educational expenses or to save for a future child.


Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are created on a child's behalf and managed by the parent until the child turns adult age. This means that an UGMA/UTMA account is owned by the child recipient. Once you put money into the UGMA/UTMA account, it is irrevocable – you cannot take back the money. It becomes the property of the child, and the child will be able to access that money once he or she becomes an adult and can spend it however he or she chooses. You cannot specify a purpose (such as education) for how funds in the UGMA/UTMA account are used. The money becomes theirs free of all encumbrances and conditions.

529 plan accounts, on the other hand, are owned by the parent and the parent can control how the funds are used and can change the beneficiary at any time. Thus, 529 plans provide greater control for the parent if there is any concern that a child might overspend the money or not use it for educational purposes before the child graduates from college.

This difference can have an impact on financial aid eligibility. Funds in an UGMA/UTMA account are considered the child's assets, whereas funds in a 529 plan account are considered the parents' assets. Since the FAFSA weighs assets held in the child's name more heavily against the child, saving in an UGMA/UTMA could result in your child receiving less financial aid.

UGMA/UTMA accounts are not tax-deferred assets so any investment gains will be taxed as normal, whereas 529 plan assets will grow tax-free and can be withdrawn tax-free.


Coverdell education savings accounts have strict eligibility requirements and low contribution limits.

You are only eligible to use a Coverdell account if your adjusted gross income is below $110,000 for an individual, or $220,000 for a married couple filing a joint return. With a 529 plan, there are no income-level restrictions.

You can only contribute a total amount of $2,000 per year to a Coverdell account. With a 529 plan, the IRS has not specified an annual contribution limit. For more information, see our FAQ on 529 contributions.

You may prefer a Coverdell account if you want to self-direct specific investments. With a 529 plan, you will choose a portfolio offered by a 529 plan, which will be made up of investments that the state-sponsored plan offers.

If you plan to use funds to cover primary and secondary school (K-12) costs, note that 529 plans can be used for tuition while Coverdell accounts can be used for both tuition and expenses.

Savings Bonds

Savings bonds used to be a popular birthday gift for kids, but there are better options now. Savings bonds used to be the only investment vehicle offering a tax incentive for college savings, but that's no longer the case. In order to receive a tax exemption for interest on savings bonds, you have to purchase a specific type of bond (such as the Series EE bond), and your modified adjusted gross income must be below a certain level. And it can be more difficult to track and redeem savings bonds.

While savings bonds used to pay a lot in interest (5% or more), interest rates for Series EE bonds are now now much lower (around 2.10%). Unlike savings bonds, money that is put in a 529 plan is invested. Series EE bonds also have more limitations on how you can spend the money, with qualified education expenses limited to covering tuition and fees but not room and board, books, or computer costs.

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