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Which Plan is Best for You?

By Harold Simansky
Educational Investment Advisor

There are a number of plans to help you save for your children’s education, but the first investment you need to make is saving for your own retirement. Unlike for college, you cannot borrow for retirement, and there is no financial aid for the over-65, Florida-bound crowd.

Because of this, don’t even think about saving for education if you haven’t adequately funded your retirement yet. (“Adequately funded” generally means that your current savings plus future expected contributions will generate enough income to maintain your desired lifestyle when combined with any other money you will be receiving, for example Social Security.)

Here’s a second crucial point to consider: Unless you’re prepared to use college savings solely for education, you should not consider any of the education-focused plans. The reason being: If you find you have to spend the money for something else, you will have to pay taxes on it and face a penalty. So if you can’t be sure what the money is going to be used for, a taxable account like a mutual fund or certificate of deposit is likely to be your smartest move. You won’t get a tax break, but at least you can spend the money on whatever you want without worrying about penalties.

Now let’s take a closer look at your choices. If you have fully funded your retirement and are prepared to lock in money for education, probably your best bet is a 529 Savings Plan or a Coverdell Education Savings Account (ESA).

The Argument for a 529

While there are numerous differences between 529s and ESAs, the biggest is that a 529 Savings Plan allows you to contribute far more than an ESA. Contributions to an ESA are limited to $2,000 per year per student, while contributions to a 529 Plan can be as high as $12,000 per year per contributor. For those wishing to contribute even more, 529 Plans allow a one-time contribution of up to $60,000 per contributor per student. This means that a couple could put as much as $120,000 into a 529 account at one time. One-time contributions come with a rule: You cannot give any more money to this student for a period of five years.

Another advantage for a 529 Savings Plan is its flexibility. It is fairly easy to change beneficiaries – or even take the money back – if you as the owner decide you need it for something else. Yes, you will have to pay a 10 percent penalty if the money is not used for education, but that is better than not having access to the money if you really need it.

The Pros and Cons of an ESA

If you are saving money for your child to attend a private primary or secondary school, this is the plan for you. An ESA is the only savings program in which the money can grow tax-advantaged and still be used for private school. The money from a 529 Savings Plan can be used only for college.

Unlike with a 529 Savings Plan, there are income restrictions for contributors to an ESA. Under current law, contributors must have less than $190,000 in modified adjusted gross income ($95,000 for single filers) in order to qualify for a full $2,000 contribution. Of course, there is one way around this issue: Simply gift the $2,000 to the student and have him or her make the contribution to the ESA. Be warned, however, that the effect this arrangement will have on financial aid eligibility is not yet clear. While ESAs are generally considered the asset of the parent – thus having only a small effect on financial aid – such a gifting arrangement may change this. If this arrangement translates into the ESA being considered the asset of the student, the hit to financial aid may be much larger. Stand by for what the government has to say on this.

Another important distinction between ESAs and 529 Savings Plans is in the permanency of their status as tax-advantaged vehicles. Under current law, withdrawals from ESAs that are used for education related expenses are free of any tax as long the withdrawal is made prior to January 1, 2011. After that time, all withdrawals from ESA’s will be subject to some tax. This is how it used to be for 529 Savings Plans as well, but the law was recently changed so that withdrawals from 529 Savings Plans that are used for education are always tax free: today, tomorrow, in 2011, and beyond. Experts have predicted that a similar tax law change will be made with regard to ESAs, thereby ensuring that withdrawals for education will always be tax free even beyond 2011. While this hasn’t happened yet, it should.

The Pros and Cons of UGMA/UTMA

Uniform Gifts to Minors Act Accounts (UGMA) and Uniform Transfers to Minors Act Accounts (UTMA) – frequently called Custodial Accounts -- are convenient ways for parents to save for their children. Unlike education-focused investment vehicles like 529 and ESA, money invested in an UGMA/UTMA can be used for any expense that is related to the child. More important for many parents, it is an easy way to save for a child’s future without giving up control over the funds.

These accounts offer significant tax advantages, but there is a serious downside regarding financial aid. They are considered to belong to the student – and thus are “taxed” far more heavily than other investment vehicles we have discussed, specifically 529 Plans. For this reason, I recommend Custodial Accounts only for students who are unlikely to receive financial aid.

Because most people are likely to go with a 529 Plan to save for college, Article Six will be devoted to helping you sort through the options. There are still more choices to make to find the savings plan that makes the most sense for your family.

Article #4 -
What is the Right Way to Save?

About the Author

Harold Simansky is the founder of Educational Investments, LLC, ( a Registered Investment Advisory firm focused on helping families save for education. His book, College Costs How Much?! The Workbook to Help You Save for School, which explains the financial aid process, is available at You can send him an e-mail at

Related Resources

Evaluating your options is important throughout the college savings and financial aid processes. These tools can help you compare award packages and loan programs: