Compare 529 savings plans to other investment options
While there are other college savings options, there are many benefits to a 529 savings plan, summarized below.
| 529 Savings Plans | Roth Individual Retirement Account | Uniform Trust/ Gift to Minors Act Account (UTMA/UGMA) | Coverdell Education Savings Account | Life Insurance | |
|---|---|---|---|---|---|
| Description | State sponsored, tax-advantaged savings vehicles for qualified higher education expenses. | Tax-advantaged retirement vehicle that may also be used to fund qualified higher education expenses. | Custodial account managed for the benefit of a minor. The account is an irrevocable transfer of assets in a child’s name. (Cannot recover the funds placed in the account.) | Tax-advantaged savings vehicle for qualified K-12 and higher education expenses. | Life insurance policies must be those which are considered “permanent” and which build cash value as premiums are paid. Using a policy’s loan provision to create cash flow will avoid any tax liability on the transaction. |
| Income Limits | None | Yes, subject to Modified Adjusted Gross Income (MAGI) limitations: Individuals: MAGI must be less than $146,000. Married, Joint: MAGI must be less than $230,000. Other restrictions apply. | None | Yes, subject to Modified Adjusted Gross Income (MAGI) limitations: Individuals: MAGI must be less than $110,000. Married, Joint: MAGI must be less than $220,000. | None |
| Age Requirements for Account Owner or Beneficiary | None | None | Account ownership transfers to the minor upon reaching the age of majority, usually between ages 18-21, or the ownership age specified when the trust was set-up. | Contributions: Beneficiary must be under age 18 unless a special needs beneficiary. Distributions: Must be completed by the time the beneficiary reaches age 30, unless a special needs beneficiary | Policy owner must be 18-21 years old depending on the state of issue, policy type, and insurance company. |
| Ability to Change the Beneficiary | Yes, at any time, to another qualified member of the current beneficiary’s family, or yourself. | Yes, at any time. But there are varying limitations and tax liabilities depending on your selection. | No | Yes, but only to another member of the current beneficiary’s family under the age of 30, or a special needs beneficiary of any age. | Yes, but irrelevant when utilizing cash value. |
| Use of Funds | Tuition. Required fees, books, and supplies. Computers, peripheral equipment, software, and internet access as long as the student is the primary user (other restrictions apply). Room and board for students attending at least half time in a degree or certificate program (certain limits apply). | Tuition, room and board, required fees, books, and supplies. | Funds must be used exclusively for the benefit of the minor. There are no restrictions on the specific use of the funds, and they don’t have to be used for educational expenses. At the age of majority, the child controls the unrestricted use of funds. | For higher education: Tuition, room and board, fees, books, special needs services, and required supplies and equipment. Students must be enrolled at least half-time. For K-12 education: Also includes uniforms, transportation, after-school programs, computer equipment and software, internet access, and tutoring. | No restrictions. |
| Maximum Contribution Limit | $500,000 cumulative for all accounts for the same beneficiary | Maximum limit is $7,000 ($8,000 for taxpayers 50+) subject to the MAGI limitations. Excess contributions are subject to a 6% excise tax. | Unlimited | The total amount of all contributions to a single beneficiary cannot exceed $2,000/year. Excess contributions are subject to a 6% penalty. | Single-premium limit based on several factors including age of policy owner and face value of the policy. Note: Modified Endowment Contract (MEC) rules dictate these factors. |
| State Tax Deduction for Contributions | Yes, for Colorado taxpayers along with select other states. | No | No | No | No |
| Federal Income Tax Treatment of Earnings | Tax free while in the account and used for qualified, higher education withdrawals. | Tax exempt while in the account. | Earnings and gains taxed to minor; first $1,300 of unearned income is tax exempt; unearned income over $2,600 for certain children under age 24 is taxed at rates for estates and trusts. | Tax free if the distributions do not exceed the beneficiary’s qualified education expenses for the year. | Taxable, unless taken as part of a policy loan. |
| Annual Limit for Gift Tax Exclusion | $18,000 single/$34,000 married couple per beneficiary in a single year without federal gift tax consequences. Multiple year options are available but restrictions apply. | Not applicable. | $18,000 single/$34,000 married couple per beneficiary in a single year without federal gift tax consequences. Multiple year options are available but restrictions apply. | The maximum contribution limit is below the annual limit for gift tax exclusion. | Not applicable. |
¹ Contributions to a Plan by Colorado taxpayers may be deductible from Colorado state income tax in the tax year of the contribution. Restrictions apply. Such deductions are subject to recapture in subsequent years in which non-qualified withdrawals are made.
² Withdrawals from a 529 savings account for K-12 tuition expenses are not subject to the federal 10% unqualified withdrawal penalty. Contributions to a CollegeInvest account for K-12 use do not currently receive a Colorado tax deduction.
³ Non-qualified withdrawals are subject to federal and state income tax on the earnings portion and a 10% penalty on the earnings portion. State tax deductions may also be subject to re-capture in subsequent years.
PRIMARY SOURCES: IRS Publication 970, IRS Publication 590, IRS Publication 929, IRS Tax Topics, IRS Tax Tips for application in tax year 2021.
Start saving for college early and benefit later
The earlier you start to save, the less you will need to borrow. Even saving $25 a month for 18 years can add-up to nearly $9,600 to pay for fees, books, a laptop and internet access. Use our college savings calculator to see how your investments could add up. (Starting with a $25 initial deposit, contributions of $25/month for 18 years, at a 6% annual rate of return. Actual results may vary.)