529 college savings plans are accounts set aside by parents, grandparents or guardians to pay for the future tuition of young children. Earnings grow tax-deferred, and the minimum contributions are kept low to allow various families to be able to afford these plans (i.e. $50 a month). Further, funds are not subject to taxation when they are withdrawn, as long as they are used for approved educational purposes. (For more information, check out MainStreet's 529 plan explainer.)
But 529 plans do have a contribution limit. So if you're looking to give more to your child's education (or you want to shop around before settling on a savings plan), here are some other options.
Coverdell Education Savings Account (CESA)
CESAs can be purchased through most brokerage and fund companies. This option provides broad investment choices and features tax-free earnings as long as they are used to pay for qualified education expenses, including elementary and high school costs.
- Contribution limits: $2,000 per year, per child.
- Qualification restrictions: Adjusted gross income must be less than $110,000 for a single filer or $220,000 for those married filing jointly.
- Financial aid treatment: Same as 529 plans.
UGMA/UTMA Custodial Account
Most financial institutions can set up UGMA/UTMA accounts for you. The first $800 of income is tax-free if the child is 13 or under. The next $800 is taxed at the child’s rate and any more income is taxed at the parents’ rate.
- Contribution limits: None, although gifts greater than $11,000 per child are subject to gift tax.
- Qualification restrictions: None.
- Financial aid treatment: Beware that this account is considered to be a student asset, so it is assessed at a 35% rate according to the national financial aid formula.