11.4 Education Savings Plans

Tax-advantaged accounts help families save for education expenses. Understanding 529 plans and Coverdell ESAs is essential for comprehensive financial planning.

529 Plans

Types of 529 Plans

Savings Plans: Investment accounts with market-based growth; most common

Prepaid Tuition Plans: Lock in current tuition rates at specific schools; less common

Tax Treatment

Contributions: NOT federally deductible (some states offer deductions)

Growth: Tax-deferred

Qualified Withdrawals: TAX-FREE

Non-Qualified Withdrawals: Earnings taxed + 10% penalty

2026 Contribution Rules

Federal Contribution Limit: No federal limit

State Limits: Vary by state ($235,000 - $575,000 total)

Gift Tax Exclusion: $19,000 per donor, per beneficiary

Superfunding (5-year averaging): $95,000 single / $190,000 married (5 x $19,000)

Superfunding (Gift Tax Averaging)

You can contribute up to 5 years' worth of annual exclusion gifts at once:

- Single: $95,000 ($19,000 x 5)

- Married Couple: $190,000 ($38,000 x 5)

Rules:

- No additional gifts to same beneficiary for 5 years

- Must report on Form 709 as series of gifts

- If donor dies within 5 years, portion included in estate

Qualified Education Expenses

Tuition and fees: Yes

Books and supplies: Yes

Room and board (at least half-time enrollment): Yes

Computer and technology: Yes

K-12 tuition and other listed K-12 expenses (curriculum, books, tutoring, test fees): Yes (up to $20,000/year from 2026)

Student loan repayment: Yes (up to $10,000 lifetime)

Apprenticeship programs: Yes

529 to Roth IRA Rollover (SECURE 2.0)

Starting in 2024, unused 529 funds can roll to a Roth IRA:

Account Age: Must be open at least 15 years

Contribution Age: Contributions in last 5 years not eligible

Annual Limit: Subject to Roth IRA annual limit ($7,500 in 2026)

Lifetime Limit: $35,000 per beneficiary

Beneficiary: Roth IRA must be owned by 529 beneficiary

Earned Income: Beneficiary must have earned income greater than or equal to rollover amount

Example: If 529 has been open 15+ years with $50,000 unused, the beneficiary can roll over up to $7,500/year (2026 limit) to their Roth IRA until reaching the $35,000 lifetime limit (about 5 years).

Key 529 Features

Owner Control: Account owner controls the money (not beneficiary)

Beneficiary Change: Can change to family member without penalty

No Income Limits: Anyone can contribute regardless of income

Financial Aid: Parental asset (5.64% assessed) vs. student asset (20%)

Coverdell Education Savings Accounts (ESAs)

Contribution Rules

Annual Limit: $2,000 per beneficiary

Contribution Deadline: Tax filing deadline

Age Limit: Must contribute before beneficiary turns 18

Use Deadline: Must be used by age 30

Income Limits (2026)

Single: Full Contribution MAGI less than $95,000; Phase-Out Begins $95,000; No Contribution greater than $110,000

Married Filing Jointly: Full Contribution MAGI less than $190,000; Phase-Out Begins $190,000; No Contribution greater than $220,000

Qualified Expenses

Broader than 529 for K-12:

- Tuition, fees, books, supplies, equipment

- Room and board

- Tutoring, special needs services

- Uniforms, transportation

- Computer technology and internet access

Coverdell Key Features

- Tax-free growth and withdrawals for qualified expenses

- More flexible K-12 expense coverage than 529

- Lower contribution limits ($2,000 vs. unlimited for 529)

- Income limits apply (unlike 529)

529 vs. Coverdell Comparison

Contribution Limit: 529 Plan - No federal limit; Coverdell ESA - $2,000/year

Income Limits: 529 Plan - None; Coverdell ESA - Yes (phases out)

K-12 Expenses: 529 Plan - Tuition and other listed K-12 expenses (up to $20,000/year from 2026); Coverdell ESA - All qualified expenses

Higher Education: 529 Plan - Full qualified expenses; Coverdell ESA - Full qualified expenses

Age Limit: 529 Plan - None; Coverdell ESA - Contribute by 18, use by 30

Control: 529 Plan - Owner; Coverdell ESA - Owner

Roth Rollover: 529 Plan - Yes (up to $35,000); Coverdell ESA - No

In Practice

When recommending education savings:

- 529 is generally preferred for higher contribution limits and no income restrictions

- Coverdell may supplement 529 for K-12 expenses a 529 does not cover (such as uniforms or transportation)

- Consider state tax deductions for in-state 529 contributions

- Superfunding allows significant front-loading for grandparents

- 529 to Roth rollover provides escape valve for unused funds

On the Exam

Series 65 frequently tests:

- 529 qualified withdrawal = tax-free

- $19,000 annual gift tax exclusion (2026)

- Superfunding: 5 x annual exclusion

- Coverdell $2,000 annual limit and income restrictions

- 529 to Roth rollover rules (15-year, $35,000 lifetime)

Key Takeaways

1. 529 qualified withdrawals are tax-free for education expenses

2. 2026 gift tax exclusion: $19,000/year; superfunding: $95,000/$190,000

3. Coverdell: $2,000/year limit, income restrictions, broader K-12 coverage

4. 529 to Roth rollover: 15-year account age, $35,000 lifetime limit

5. 529 beneficiary can be changed to family member

6. 529 has no income limits for contributions; Coverdell does