College Planning

There are many different ways to save for college!

529 Savings Plans can now be used to pay for K-12 tuition and expenses, up to $10,000 per year.

Families currently saving in a Coverdell ESA can now switch to a 529 plan with no tax consequences.
Existing 529 Savings Plans can now be rolled into 529 ABLE accounts. The amount you can roll over is capped at $15,000, which is the 2018 annual ABLE contribution limit.

There are two types of 529 plans—college savings plans and prepaid tuition plans. The college savings version allows earnings to grow tax-deferred and withdrawals are tax-free when used for qualified education expenses. Every state offers at least one of these types of plans. Some states offer both, and a consortium of private colleges also offers a prepaid tuition plan.

529 College Savings: 2018 Changes
The Tax Cut and Jobs Act brought important changes to 529 plans: With college savings plans, students of all ages can save for all college costs, including tuition, fees, room, board, textbooks, and computers (if required by the school). Beginning in 2018, 529 Savings Plans can be used to pay for K-12 tuition and expenses for public, private and religious schools, up to $10,000 per year.

Not Just for Children: If you are considering going back to college or graduate school, you can open a college savings plan for yourself. You will save on taxes, and if you end up not going to school, you can always transfer the money, tax-free, to another 529 plan for your children or spouse.

Not Limited to In-State Public Colleges or State Residents: Withdrawals from college savings plans can be used at most colleges and universities throughout the country, including graduate schools. Some overseas educational institutions also may be eligible. Many states now offer at least one college savings plan that has no residency restrictions. You can live in Ohio, contribute to a plan in Maine and send your child to college in California. However, if your state offers state tax advantages to residents who participate in the local plan, you will miss out if you opt for another state's 529 plan. If you plan to use your 529 savings for K-12 tuition and expenses, check with your state to see if it allows a state tax deduction for qualified withdrawals (qualified withdrawals are free from federal taxes for everyone).

529 Prepaid Tuition: Prepaid tuition plans allow parents, grandparents, and others to prepay tuition at today’s tuition rates at eligible public and private colleges or universities, helping them manage future tuition costs.

Contribution Limits and Covered Expenses: You pay for amounts of tuition (years, credits, or units) in one lump sum or through installment payments. There are several options. Some prepaid tuition plans offer contracts for a two-year community college or a four-year undergraduate program, or a combination of the two, and can cover one to five years of tuition. Some plans even allow the contract to be applied to graduate school tuition. With only a few exceptions, however, most prepaid tuition plans do not cover other expenses, such as room and board. So, you may want to consider other college savings options to cover these costs.

Guarantees and Safety Features: Most states guarantee that the funds you put into a prepaid plan will keep pace with tuition. Some states back their prepaid tuition plans by the full faith and credit of the state, meaning that if the program should find itself in financial difficulty, the state will step in to provide the necessary funding. Other states do not have a formal guarantee but do have a formal process by which the state's legislature will consider making an appropriation if necessary. Some states offer no guarantees that the plan will fund the future cost of tuition or that the state will step in should the plan falter.

Residency Requirements and Other Limitations: Unlike 529 college savings plans, most state prepaid tuition plans require either you or your child to be a resident of the state offering the plan when you apply. Some limit enrollment to a certain period each year. Many prepaid tuition plans also have age or grade limits for beneficiaries (i.e., future college students).

Investment Options
Prepaid tuition plans have no investment options. Under prepaid plans, the price of the contract is determined prior to purchase and usually depends on the type of contract, the current grade of the beneficiary, the current and projected cost of tuition and the projected rate of return. These programs then pool the money and make long-range investments so that the earnings meet or exceed college tuition increases. When a child is ready to go to college, the plan transfers funds to cover the tuition directly to the institution.

ABLE Accounts: 529 A Savings Plans: The Achieving a Better Life Experience (ABLE) Act of 2014 provided Americans with disabilities the opportunity to save up to $15,000 per year in a tax-deferred account like a 529 college savings plan, as a supplement to their government benefits. An ABLE account, also called a 529 A account, allows individuals with disabilities and their families a tax-advantaged way to save money for disability-related expenses of the account’s designated beneficiary. The annual contribution limit for an ABLE account is $15,000 per individual (2018), and total contribution limits vary by state. Contributions to an ABLE account may be made by any person (the account beneficiary, family, and friends) using post-taxed dollars. Contributions are not tax deductible, although some states may allow for state income tax deductions for contributions made to an ABLE account.

New in 2018: Recently enacted tax changes now allow savings in a 529 account to be rolled into an ABLE account. You can roll over up to the annual contribution limit ($15,000) until January 1, 2026. The 529 account must be for the same beneficiary as the ABLE account or for a member of the same family as the ABLE account holder.

Coverdell & Custodial Accounts: People who want to save for a child’s college education have a wide array of choices.  Among these are Coverdell Education Saving Accounts (ESAs) and custodial brokerage accounts. Both options usually give you more investment choices than other college savings vehicles.

What Are ESAs? Formerly known as Education IRAs, ESAs are another tax-advantaged way to pay for college. Unlike 529 plans, your investment options are virtually limitless. Except for investing in life insurance contracts, you can buy and sell what you want whenever you want. Also, you can set them up at almost any brokerage firm, mutual-fund company, or other financial institution.

Federal Tax Advantages
As with 529 plans, contributions are not deductible, but earnings in ESAs are tax-deferred, and withdrawals that are used for qualified education expenses are tax-free.

Education Expenses Covered
One advantage that ESAs have over other tax-advantaged saving options is that you can make tax-free withdrawals to pay for private elementary and high school expenses, as well as post-secondary school expenses. So, if a private school is in the future, one option you might want to consider is saving for that expense in an ESA and using a 529 plan for college.

Saving Bonds: Series EE and I Savings Bonds for College Savings U.S. Series EE savings bonds issued after 1989 or Series I saving bonds offer a tax-advantaged way to save for college.

Advantages: Backed by the full faith and credit of the United States government, the interest from these bonds is tax-free if used for qualified higher education expenses. Also, interest on Series EE and I savings bonds is usually exempt from state and local taxes.

Income limits apply. In tax year 2017 the full interest exclusion is only available to couples filing jointly with modified adjusted gross income of less than $116,300, and for single filers with modified adjusted gross income of less than $77,550. The interest exclusion phases out completely when your modified adjusted gross income reaches $146,300 for joint filers and $92,550 for single taxpayers. You can learn more about the Educational Savings Bond Program in IRS Publication 970: Tax Benefits for Education.

The rules for using savings bonds for education can be complicated. To learn more about using savings bonds for educational expenses, you can call the Federal Reserve toll-free at (800) 553-2663. You can call the Bureau of Public Debt toll-free at (800) 487-2663 for information on the latest rates for Series EE and Series I savings bonds, or at (800) 722-2678 to learn how to buy savings bonds directly from the federal government.

Helpful Links and Articles:


529 Prepaid Tuition

ABLE Accounts

Coverdell/Custodial Accounts

Savings Bonds

Higher Education: College Savings


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