National 529 Day | Savings Tips From Our Advisors
For many families, supporting a child’s or grandchild’s education is a top financial priority. Using your resources to invest in the next generation is a meaningful goal. But with several education savings options available, how do you choose the right one?
In honor of National 529 day on May 29th, take some time to explore what education savings plan may be best for you. While 529 plans are among the most popular, there are other programs worth considering. Let’s break down the main options to help you decide which best fits your needs.
529 Plans
A 529 plan is a tax-advantaged investment account designed to help pay for qualified educational expenses for a named beneficiary. These expenses can include tuition for college or K-12 schools, certain apprenticeship costs, and even student loan repayments.1
The key advantage of a 529 plan is that your contributions grow tax-free, and withdrawals are also tax-free when used for eligible education costs. Additionally, more than 30 states offer tax deductions or credits for 529 contributions. For instance, contributions to a Michigan 529 savings plan of up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible in computing Michigan taxable income.2
There are no annual contribution limits for 529 plans, although most states set a lifetime cap. However, be aware that you may have to pay a gift tax for contributions above $18,000 per beneficiary in 2024.3,4 Another benefit is flexibility: if the intended beneficiary doesn’t need the funds, you can transfer the account to another qualifying family member, such as a spouse, child, niece, nephew, cousin, or in-law.
Education Savings Accounts (ESA)
Education Savings Accounts (ESA), also known as Coverdell ESA, offer another way to save for education. ESAs differ from 529 plans in several important ways.
One major benefit of an ESA is greater investment flexibility. You can select from a wide range of investments, stocks, bonds, mutual funds, and more, giving you more control over how your money is managed. In contrast, 529 plans typically offer a limited menu of investment options chosen by the plan administrator.
While you may have more control over your investment options, Education Savings Accounts come with stricter contribution limits. You can contribute up to $2,000 per year per child, and there are income restrictions: individuals earning more than $110,000 and couples earning more than $220,000 jointly are not eligible to contribute.5
There are also age-related rules. You can only open an ESA for a beneficiary under 18, and contributions must stop once the beneficiary turns 18. All funds must be withdrawn by the time the beneficiary reaches 30. Like 529 plans, ESA contributions grow tax-free and withdrawals are tax-free when used for qualified educational expenses.
Choosing the Right Plan
Contributing to a loved one’s education not only supports their future but can also offer you tax advantages. Whether you choose a 529 plan, an ESA, or another savings vehicle, planning ahead for education expenses is always a wise move.
More information about saving for college
- https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
- https://www.savingforcollege.com/compare-529-plans/state-tax-deductions
- https://www.savingforcollege.com/intro-to-529s/name-the-top-7-benefits-of-529-plans
- https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
- https://www.investopedia.com/terms/c/coverdellesa.asp
- This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.