By Michael "Drew" Tyler, CFA | April 2025
529 Plans
There are two types of 529 plans: College Savings Plans and Prepaid Tuition Plans.
College Savings Plans are one of the most popular ways to save for college. They offer tax-free growth and tax-free withdrawals when used for qualified education expenses. Every state has its own plan, but you're not limited to your home state’s option. For example, residents of Arkansas can choose Utah’s or Nevada’s plan, which are known for low fees and strong investment choices. Some states, however, offer tax deductions for using their plan, so it’s worth consulting a financial advisor before deciding.
There are no income limits on contributions, and lifetime contribution limits typically exceed $200,000 per beneficiary (varies by state). You can even start a plan before your child is born—designate yourself as the beneficiary initially and change it later. 529 funds can also be used for K–12 tuition (up to $10,000/year).
A newer feature allows unused 529 funds to be rolled into the beneficiary’s Roth IRA, up to a $35,000 lifetime cap. This rollover is subject to annual Roth limits and requires the 529 to have been open for at least 15 years, with contributions aged at least 5 years. Changing beneficiaries may reset the 15-year clock.
Prepaid Tuition Plans let you lock in today’s tuition rates for future college costs. However, they’re not as widely available and may only be offered to residents or apply to in-state schools. The Private College 529 Plan is an exception, allowing prepaid tuition at around 300 private colleges nationwide.
Coverdell Education Savings Accounts (ESAs)
Coverdell accounts differ from 529s in a few key ways. They can be used for a broader range of K–12 expenses—not just tuition but also books, supplies, equipment, and tutoring. They aren't tied to state-sponsored plans, so you can choose your own investment options.
However, they come with stricter rules: annual contributions are capped at $2,000 per beneficiary, and contributors must meet income requirements (MAGI under $95k–$110k for single filers or $190k–$220k for joint). The beneficiary must be under 18 at the time of contribution, and funds must be used by age 30. There's no Roth IRA conversion option, though you can roll a Coverdell into a 529 plan for the same beneficiary.
Another consideration: account ownership transfers to the beneficiary at age 18–21, depending on the state—something parents may or may not be comfortable with.
Custodial Accounts (UGMA/UTMA)
Custodial accounts offer the most flexibility but come with fewer tax advantages. They can hold nearly any type of financial asset, and there are no contribution limits or restrictions on how funds are eventually used. However, once the child reaches the age of majority (18–21 depending on the state), they gain full control of the account.
There is a modest tax benefit: unearned income is subject to the Kiddie Tax rules, where the first $1,350 is tax-free, the next $1,350 is taxed at the child’s rate, and anything above that is taxed at the parent’s rate.
This post is intended for educational purposes only and should not be considered financial advice.