While 529 education savings plans and custodial accounts are generally the most common ways to save for education, below are several additional options available to education savers:
- Personal investments and zero coupon bonds are available at Edward Jones.
- Savings bonds may be purchased online at the United State Department of Treasury website, Treasury Direct.
- Coverdell education savings accounts are available at other financial services firms.
Here's more information about these options:
- How it works – You can earmark a portfolio of your personal investments for "college savings".
- Flexibility – Your personal assets can be used for any purpose, and there are no contribution limits because it's totally up to you how you plan to use them. But since assets may be earmarked for multiple goals, it may be difficult to identify exactly how much you've saved for education. But, then again, if you don't end up using them for education, you can give them as a gift or use them for another purpose.
- Taxes – There aren't any tax benefits, though. All earnings are taxed at the account owner's regular rate.
- Financial aid – Personal investments are generally considered the assets of the account owner (e.g., the parent or parents), but the parents' assets may have less impact on financial aid than the student's assets or the parents' income.
Zero coupon bonds
- What is it? – A zero coupon bond is a type of investment, but it doesn’t pay interest. Instead, a zero coupon bond is sold at a discount. Then, if you hold the bond until maturity, it's guaranteed to be redeemed at face value, which is typically more than the purchase price. Zero coupon bonds may be of interest for college savings because they provide a known return on investment on a predetermined date and can be structured to mature right before a child or grandchild goes to college.
- Flexibility – Zero coupons are flexible too. You can "earmark" a bond or series of bonds for college, which means if it turns out you don't need the earnings for a child's education, you don't have to use them for that purpose. And there are no penalties or tax consequences related to how the bonds are used.
- Taxes – If you purchase a "municipal" zero coupon bond from a state or city, they may be tax-free. Other types of zero coupon bonds are subject to federal income tax.
- Financial aid – When it comes to financial aid, they are considered owner assets (e.g., parent), so have less impact than the student's assets or the parent's income.
- What is it? – A savings bond is not a type of account. It's a type of investment. Typically, savings bonds are issued by the U.S. Department of the Treasury, so they are backed by the full faith and credit of the U.S. government. It works like this: You buy a bond, with a guaranteed – but limited – interest rate. Then, when the bond matures, it's redeemed for that exact amount.
- Taxes – The earnings from the bond don't have to be claimed as income for income tax purposes, as long as the proceeds are used for a qualified education expense – with certain restrictions. Upon maturity, interest on any bond redeemed is subject to federal income tax if not used for qualified education expenses in that year. However, 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 (e.g., the parent's) asset, which means they may have less impact on financial aid than the student's assets or the parent's income.
- Contribution limit – Contributions are limited to $10,000 per year, per Social Security number and bond type.1
Coverdell Education Savings Account
- What is it? – Coverdell Education Savings Account was created to help parents pay for children's education at any level, from kindergarten through high school and higher education.
- How it works – Anyone younger than 30 can be the beneficiary of a Coverdell. Contributions aren't deductible for federal income tax purposes, and they are limited to $2,000 per year, per child, until the child reaches age 18. You may be eligible for a full contribution ($2,000), a reduced contribution or no contribution at all, depending on your modified adjusted gross income (MAGI) for the year. But if withdrawals are used for nonqualified educational expenses, they are subject to ordinary income tax plus a 10% penalty on the earnings. Any balance remaining in the Coverdell must be distributed or transferred to another eligible family member when the beneficiary reaches age 30.
- Taxes – Coverdell contributions aren't tax-deductible, but withdrawals aren't subject to federal income taxes as long as they are "qualified education expenses," such as tuition and fees.
- Financial aid – College savings plans can impact a student's eligibility for financial aid. Regardless of whether the Coverdell is owned by either the student or the parent, it's generally considered a parental asset, which will likely have less impact on financial aid.
How we can help
Your Edward Jones financial advisor can help you learn more about your options and put together a strategy to achieve your education-saving goals.
1 $10,000 limit applies separately to electronic Series EE and I bonds. $5,000 limit applies to paper Series I bonds.
This content should not be depended upon for other than broadly informational purposes. Please consult your tax advisor about your situation. Edward Jones, its financial advisors and employees cannot provide tax or legal advice.