Comparing Education Savings Accounts

Learn how 529 plans, Coverdell ESAs, and custodial accounts work

April 10, 2025 • Chris Kawashima

You have a variety of choices when it comes to saving for your child's education: 529 plans, Coverdell ESAs, and custodial accounts. Let's review your choices.

Education is expensive, but putting an education savings plan in place early can give you and your child a valuable head start. Accounts designed for education savings (such as 529 plans and Coverdell Education Savings Accounts) can potentially provide tax advantages when used for qualified education expenses like tuition or certain school-related expenses like books, supplies, computers, and room and board.

Ahead, we'll look at three common types of accounts that can be used for education and compare the contribution limits, investment options, tax considerations, and more.

Types of accounts that can be used for education

529 college savings plans

Most states have a 529 plan that generally offers federally tax-deferred growth and tax-free withdrawals as long as you use the money to pay for qualified education expenses. There's no annual contribution limit, but each state sets their own lifetime limit per beneficiary that restricts new contributions once the account reaches a certain value (in the range of $400,00 to $550,000). However, federal gift tax rules apply to 529 plan contributions (more about gift tax in the chart below).

529 plans aren't limited to college tuition and expenses. For example, up to $10,000 a year from a 529 plan can be used to pay for an eligible elementary, middle, and high school expenses, including public, religious, and private school tuition. Additionally, the beneficiary of a 529 account can pay off up to $10,000 in student loans (the lifetime limit) without incurring any penalties or tax consequences.

Coverdell Education Savings Accounts (ESAs)

A Coverdell ESA is another tax-advantaged account. ESA programs offer the ability for investments to potentially grow tax-deferred, and withdrawals are generally free from taxes as long as you use the money for qualified education expenses. Tax-free withdrawals apply to eligible elementary and secondary education expenses (including public, private, and religious schools), as well as college expenses.

There is, however, a bit of a catch with eligibility due to income limitations. The maximum annual contribution to a Coverdell account is $2,000 for joint filers with a modified gross income (MAGI) up to $190,000 and is gradually reduced for MAGI between $190,000 and $220,000. Incomes above $220,000 are ineligible to contribute to a Coverdell ESA.

Custodial Accounts (UGMA or UTMA)

Though a custodial account is not specifically designated for education expenses, it can certainly be used for them. Custodial accounts like the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) are typically established for a child and are managed by a custodian. Typically, when a child reaches age 18, 21, or up to age 25, depending on the state of residence, legal control of the account transfers from the custodian to the beneficiary.

The main benefit of the account is parents can take advantage of the annual gift tax exclusion to fund the account while maintaining control over how the money is invested and spent while the child is a minor. Custodial accounts also provide parents with more flexibility on how the money is spent, as long as the money is used for the child's benefit.

Comparison of education savings accounts


Category	529 Savings Plans	Coverdell ESA	Custodial Accounts
What is it?	State-sponsored, tax-deferred education investment account that allows you to invest primarily for college education.	Tax-deferred account, set up and managed by a parent or guardian to help pay for a child's qualified education expenses from kindergarten through college.	Taxable brokerage account that can be used for the benefit of the minor.
What can you use it for?	Primarily college or other post-secondary education tuition and qualified education expenses. For K-12, federally tax-free distributions cover tuition expenses only.	K-12, college, or other post-secondary education tuition and qualified education expenses.	Can be used for educational purposes or any other purpose for the beneficiary.
2025 federal tax benefits	Earnings can potentially grow tax-deferred. Tax-free withdrawals for qualified education expenses, which include up to $10,000 for primary or secondary school tuition.*	Earnings can potentially grow tax-deferred. Tax-free withdrawals for qualified expenses for kindergarten through college.	Dependent children under 19 for 2025.** First $1,350 of unearned income is exempt from federal income tax. Next $1,350 of unearned income is taxed at child's tax rate. Any unearned income over $2,700 is taxed at parents' tax rate. Note: These amounts can change annually and some states have different income tax rules for child's income.
Age limits for beneficiaries (such as your child)	No age limit in most states.	Beneficiary must be under age 18 during the year of contribution (special rules apply for children with special needs). Money must be used or transferred to another beneficiary before child turns 30.	Check your state for the exact age eligibility. In most states, the age limit is somewhere between age 18 to 21.
2025 contribution limits	You can typically contribute up to $19,000/year per beneficiary ($38,000 per couple) without potentially incurring a gift tax for 2025.^† Or "super fund" up to $95,000 ($190,000 for couples) by funding 5-years worth of annual gifts into a single year. Contributions limited by lifetime accumulation cap. Varies by state (generally within a range of $400,000-$550,000 per beneficiary).	Annual contributions are capped at $2,000 for joint filers with a modified adjusted gross income (MAGI) up to $190,000 and are gradually reduced for MAGI between $190,000 and $220,000. Incomes above $220,000 are ineligible.†† Gift tax rules may apply.	No limit. Gift tax may apply^§.
Investment options	Limited to age-based portfolio or static portfolio.	Many investments available.	Many investments available.
What if you don't use it for qualified education expenses?	Earnings are generally taxable to the beneficiary along with a 10% federal penalty unless exceptions apply. Some states may recapture deductions/credits if taken.	Earnings are generally taxable to the beneficiary, along with a 10% federal penalty, unless exceptions apply.	Can be used for any purpose—inside or outside of education— if the proceeds are used for the benefit of the minor.
Effect on financial aid	Low. Generally, counts as an asset of the parent/ account owner in determining financial aid.	Low. Counts as an asset of the parent or account owner in determining financial aid.	High. Counts as an asset of the beneficiary, so may significantly impact financial aid.
Who can open and contribute?	Parents, grandparents, family members, and friends on behalf of a child or adult.	Any individual whose MAGI is under the limit can open and contribute.	Anyone can open an account and manage it as the custodian. The minimum to open an account generally ranges from $500 to $2,000. Anyone can make unlimited contributions to the account, but the gift tax and the kiddie tax‡ apply. When the child reaches a specific age (determined by each state), legal control of the account transfers from the custodian to the beneficiary.

Disclosures

^*Check with the state's 529 plan rules to see if they permit this option. Not all states follow the federal tax rules. You may be subject to state income tax and penalties for using 529 amounts for K-12 tuition expenses.

^**Full-time college students under the age of 24 may also be taxed at their parents' rate on unearned income in excess of $2,600 in 2024 and $2,700 in 2025, unless the students' earned income was greater than one-half of their support. Earned income from a job or self-employment is not subject to the kiddie tax.

^†For 2025, it's possible to contribute a lump sum (superfund) of up to $95,000 to one or more 529 college savings plan in a single year (or $190,000 for couples) without being subject to the potential gift tax. The IRS views the money as an annual $19,000 (or $38,000 for couples) gift over five years. However, if you contribute more money on behalf of the same child during those five years, you may trigger the gift tax.

^††Annual contributions for single filers are capped at $2,000 for MAGI up to $95,000 and are phased out for MAGI between $95,000 and $110,000.

^§Custodial accounts are subject to the so-called "kiddie tax." This tax rule applies to children who have unearned income (i.e., investment income) up to a certain threshold. Over that threshold, the child will pay taxes at the parent's tax rate. To learn more, see IRS Publication 929.

^§§Rule does not apply to special needs beneficiaries.

^‡Amounts over $19,000 per person ($38,000 for a married couple) in 2025 may be subject to the gift tax.

Review your education savings plan annually

If you've already opened an education savings account, review your plan (and your overall savings and investment strategy) annually to make sure it aligns with your current education needs and goals.

For example, if you already have a college savings account like an ESA, would opening a 529 Plan or custodial account help you reach your goals sooner and give you greater tax benefits, due to higher contribution limits?

If you have a new child, grandchild, or other beneficiary, do you need to set up a new education savings plan for them? In addition to a 529 or ESA (for qualified education costs), do you need another account (such as a custodial or regular savings account) to save for "nonqualified" costs your child might have while in school such as off-campus housing, car repairs, travel, or club dues?

The benefits of saving early for your child's education

Planning, investing, and saving for college can feel overwhelming, but knowing your choices and getting an early start can help you boost potential savings and make progress toward your goal. Using accounts designed for education savings can potentially offer valuable tax advantages— and starting early allows you to take advantage of the power of compounding.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Investors should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.

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