5 Education Savings Account Options

As you begin saving for your child’s education, many questions may come to mind. How much to save each month, when to begin saving and the type of account you should use will likely factor into your education savings strategy.

529 education savings plans are generally the most common ways to save for education, but a variety of account options are available to education savers.

Education savings options

529 education savings plans

What is a 529 education savings plan?
A 529 education savings plan is an investment account that can be used toward elementary, secondary and higher education expenses, as well as apprenticeships and student loan repayment, for the account beneficiary. Each state sponsors its own plan, so it’s important to understand the rules and options for the state plan you’re using.

How 529 plans work
A 529 plan can be set up for a beneficiary of any age to save and grow money for qualified education expenses. Additionally, anyone can contribute to this account. Contributions are treated as gifts, so most people will want to stay within the annual gifting limit (which for 2024 is $18,000 for single filers and $36,000 for married filing jointly). That said, 529 plans have a super funding provision that allows you to contribute up to five times the annual gifting amount. Each state offers different plans with their own investment options, and you do not have to use your home state’s plan.

Taxes on 529 plans
529 plan contributions aren’t deductible for federal income taxes, but many state plans offer state income tax deductions for contributions. Earnings grow tax free. When used for qualified education expenses, distributions are federally tax free.

Financial aid
For financial aid purposes, 529 plans are considered the account owner’s asset (e.g., parental assets). Parental assets have less impact on financial aid than student assets or parental income.

Unused 529 plan balances
There are many options for repurposing 529 plans, but most still involve funding education either for the beneficiary or a family member of the beneficiary. Some recently added flexibility is rolling 529 funds into a Roth IRA for the beneficiary, but this is subject to certain criteria and limitations.

If distributions are used for nonqualified expenses, earnings are subject to taxes and a 10% penalty. Speak with your financial advisor to make sure you are not overfunding your plan.

Coverdell education savings account

What is a Coverdell account?
A Coverdell education savings account is an investment account that can be used toward elementary, secondary and higher education expenses for the account beneficiary.

How Coverdell accounts work for education
A Coverdell account may be established for a beneficiary younger than 18 (or for a beneficiary with special needs). Contributions are generally limited to $2,000 per year, per child, until the child reaches age 18. Students may be eligible for a full contribution, a reduced contribution or no contribution at all, depending on your modified adjusted gross income (MAGI) for the year.

Taxes on Coverdell accounts
Coverdell contributions aren’t tax deductible. Earnings grow tax free. When used for qualified education expenses, distributions are federally tax free.

Financial aid
For financial aid purposes, Coverdell accounts are generally considered the account owner’s asset (e.g., parental assets). Parental assets have less impact on financial aid than student assets or parental income.

Unused Coverdell account balances
When the beneficiary reaches age 30, you must take action on any remaining balance unless the beneficiary has special needs. Actions could include distributing any remaining balance, transferring it to a 529 plan for the same beneficiary or transferring it to a 529 or Coverdell for another eligible family member.

If distributions are used for nonqualified expenses, earnings are subject to taxes and a 10% penalty.

Savings bonds

What is a savings bond?
A savings bond is not a type of account, but rather a type of investment. Education savings bonds are issued by the U.S. Department of the Treasury, so they are backed by the U.S. government. Savings bonds may be purchased online from the Treasury.

How savings bonds work for education
You buy a series EE or I bond. Purchases are limited to $10,000 per year, per Social Security number and bond type, plus an additional $5,000 in paper I-bonds if you use your tax return for the purchase. The owner must be at least 24 years old at the time of purchase to qualify for the education-related tax benefits. When the bond matures, it’s redeemed for that exact amount. You can use the proceeds and interest to help cover education expenses.

Taxes on savings bonds
The earnings from the bond may not have to be claimed as income for income tax purposes, as long as the proceeds are used for qualified education expenses — with certain restrictions. Income limits may restrict your ability to receive tax-free income.

Financial aid
For financial aid purposes, savings bonds are considered the account owner’s asset (e.g., parental assets). Parental assets have less impact on financial aid than student assets or parental income.

Unused savings bond balances
Upon maturity, interest on any bond redeemed is subject to federal income taxes if not used for qualified education expenses in that year. But there are no penalties for using the proceeds and interest of the bonds for any purpose.

Taxable investment account

What is a taxable investment account?
Taxable investment accounts are savings accounts that you set up with a financial institution. They don’t offer tax benefits, like 529s or Coverdells, but also don’t have any penalties for accessing them for other purposes.

How taxable investment accounts work for education
You can earmark a portfolio of your personal investments to use for college savings. There are no contribution limits. But since assets may be earmarked for multiple goals, it may be important to identify exactly how much you’ve saved for education, or to use a separate account solely for this purpose.

Taxes on investment accounts
There aren’t any tax benefits. All earnings are taxed at the account owner’s regular rate.

Financial aid
Personal investments are considered the assets of the account owner (e.g., the parents). Parental assets have less impact on financial aid than student assets or parental income.

Unused investment account balances
If for some reason you don’t end up using the assets for education, you can use them for any purpose.

Custodial account

What is a custodial account?
A custodial account can be opened for a minor to save and invest money for their benefit. This account is controlled by an adult who serves as the custodian until the minor reaches the age of termination (typically 18 or 21, though some state laws allow an older age). Contributions are irrevocable, which means they cannot be reversed, and the beneficiary cannot be changed. Once the account control transfers to the beneficiary, the money can be used at their discretion, which may or may not be how you intended.

How custodial accounts work for education
There are no contribution limits with a custodial account, and funds can be used to provide minors with cash or to build investment assets, which can be available to pay for college expenses. Additionally, custodial accounts have no distribution limits, but funds must be used solely for the beneficiary.

Taxes on custodial accounts
Custodial accounts are seen as the minor’s asset. Earnings are taxed at their tax rate, up to a certain point, after which it is taxed at the parents’ marginal rates. Once the minor reaches the age of majority, the account is fully taxable at their rate. Withdrawals are taxed, even if used for education expenses.

Financial aid
A custodial account could have a larger impact on the student’s ability to receive financial aid, since it is considered the student’s asset.

Unused custodial account balances
If your student doesn’t end up using the assets for education, they can be used for any purpose (provided it’s solely for the benefit of the beneficiary).

How Edward Jones can help

At Edward Jones, we’re committed to offering comprehensive financial planning services based on your unique financial needs. We work to understand your personal short- and long-term goals and build a customized strategy to help you get there. Find an Edward Jones financial advisor to get started.