Tax rules for 529 plans.

Contributions to a 529 plan are not tax-deductible. Earnings on investments in a 529 plan grow tax-deferred, and withdrawals are tax-free as long as they’re used for qualified education expenses. Although there’s no limit to how much you can contribute each year, each state’s plan has its own lifetime limit—typically more than $200,000 per designated beneficiary.¹ You can also treat a 529 contribution as being made over five years for gift tax purposes. For example, a married couple could contribute up to $140,000 per child up front without using any of their lifetime gift tax credit.

Tax benefits of an ESA.

Contributions to an ESA are not tax-deductible. Earnings on investments in an ESA grow tax-deferred, and withdrawals are tax-free as long as they’re used for qualified education expenses. If you’re a single filer, you may make a maximum contribution of $2,000 per year per child, subject to income limitations. Be careful if accounts are established by different family members for the same child. Total contributions may not exceed $2,000 in any one year.

Contribution limits for 2016.

529 plan ESA
What is it? A state-sponsored, tax-deferred college investment account An education savings account set up and managed by a parent or guardian for the benefit of a minor child
Earnings Tax-deferred Tax-deferred
Amount you can contribute without owing gift taxes Up to $70,000 ($140,000 per couple) per beneficiary in a single year (if you elect to recognize that gift over five years for tax purposes and make no additional gifts to that beneficiary over the next five years1) N/A
Withdrawals Free of federal income taxes when used for qualified education expenses2 Free of federal income taxes when used for qualified education expenses2
Contribution limits Lifetime limit for each beneficiary that varies by state; $365,000 on average3 $2,000 per year, subject to adjusted gross income limitations per beneficiary4
Penalty for nonqualified use Earnings are taxed as ordinary income and may be subject to a 10% federal tax penalty Earnings are taxed as ordinary income and may be subject to a 10% federal tax penalty
Investment choices Choose from pre-defined asset allocation portfolios Managed by a parent or guardian
Impact on financial aid 529 plans are counted as assets of the parent or account owner in determining financial aid ESAs are counted as assets of the parent or account owner in determining financial aid
Age limits None for beneficiaries Contributions can be made until the beneficiary reaches age 18; funds must be distributed to the beneficiary by age 30

Additional resources.

For help deciding which plan might be the best fit for you, visit our overview of college savings plans.

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Clients of independent investment advisors: You may also contact your advisor or call Schwab Alliance at 800-515-2157.