June 19, 2019
Major Features of 529 Plans and Coverdells
There are two types of tax-advantaged education savings
current prices that entitle the beneficiary to future academic
accounts. The first are qualified tuition programs (QTPs),
periods, course units, or a percentage of tuition costs.
commonly called 529 plans (referring to the section of the
tax code that dictates their tax treatment). The second are
Coverdells
Coverdell education savings accounts (ESAs), often
A Coverdell is a tax-advantaged investment account that
referred to simply as Coverdells. This In Focus compares
can be used to pay for both higher-education expenses and
the major features of these two types of accounts.
elementary and secondary school expenses (elementary and
secondary school expenses are not limited to tuition
529 Plans
expenses). The tax advantages of Coverdells are very
With 529 plans, distributions (i.e., withdrawals) are tax-free
similar to those of 529 plans. Unlike 529 plans, annual
(including any investment earnings) if they are used to pay
contributions are limited to $2,000 per beneficiary across
for qualified higher education expenses. In addition, up to
all Coverdell ESAs, and the ability to make contributions is
$10,000 may be withdrawn tax-free per beneficiary per year
phased out for higher-income taxpayers. In contrast, 529
and used for qualifying elementary and secondary school
plans are typically capped only by significantly higher
tuition expenses. If some or all of the distribution is used to
lifetime contribution limits.
pay for nonqualified expenses, then the earnings portion of
the distribution is taxable, and may be subject to a 10% tax
There are also benefits to 529 plans and Coverdells outside
penalty.
of the tax code. These plans are treated more favorably than
other types of college savings or investments when
Most 529 plans are 529 savings plans, in which a
determining a student’s eligibility for federal need-based
contributor invests in a portfolio of mutual funds or other
student aid.
underlying investments. The savings and accumulated
investment earnings can be used to pay for qualified
More information can be found in CRS Report R42807,
education expenses at a later point in time.
Tax-Preferred College Savings Plans: An Introduction to
529 Plans, by Margot L. Crandall-Hollick, and CRS Report
Another less common type of 529 plan is a prepaid tuition
R42809, Tax-Preferred College Savings Plans: An
plan. In a prepaid plan, a contributor makes payments at
Introduction to Coverdells, by Margot L. Crandall-Hollick.
Table 1. Major Features of 529 Plans and Coverdells
529 Plans
Coverdells
Federal Income Tax Treatment
Contributions
Not deductible from federal income tax.
Not deductible from federal income tax.
Withdrawals
Excluded from gross income (exempt from income tax)
Excluded from gross income (exempt from income tax)
if distributed for qualified expenses; subject to income
if distributed for qualified expenses; subject to income
tax and possibly a 10% penalty if not used for qualified
tax and possibly a 10% penalty if not used for qualified
expenses.
expenses.
Contribution Limit
No fixed contribution limit. Lifetime account balance
Annual limit of $2,000 per beneficiary, subject to phase-
limit set by state; ranged from $235,000 to $529,000 in
out if contributor’s income is between $95,000 and
2018.
$110,000 (between $190,000 and $220,000 for joint
filers).
Contributions in excess of $2,000 are subject to a 6%
excise tax.
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Major Features of 529 Plans and Coverdells
529 Plans
Coverdells
Federal Gift and Estate Tax Treatment of Contributions
Gift
Contributions are treated as completed gifts; for 2018
Contributions are treated as completed gifts; for 2018
and 2019, contributions of $15,000 or less are excluded
and 2019, contributions of $15,000 or less are excluded
from the gift tax. This amount is adjusted for inflation. A
from the gift tax. This amount is adjusted for inflation.
contributor may be able to make a contribution above
the $15,000 gift tax exclusion by treating the
contribution as if it were spread over five years.
Estate
Value of plan not included in contributor’s gross estate,
Value of plan not included in contributor’s gross estate.
except if the contributor has taken the five-year
election, in which case the portion of contributions
allocable to periods after the death of the donor is
included in the gross estate.
Qualifying Expenses
Elementary
Up to $10,000 per beneficiary in annual expenses for
Tuition, fees, books, supplies, equipment, academic
and
tuition only.
tutoring, and special-needs services. Room and board,
Secondary
uniforms, and transportation if required for attendance.
Computer and peripheral equipment, software, and
Internet access if used by beneficiary and/or the
beneficiary’s family while the beneficiary is in elementary
or secondary school.
Higher
Tuition, fees, books, supplies, and equipment required
Tuition, fees, books, supplies, and equipment required
Education
for enrollment; expenses for special-needs services;
for enrollment; expenses for special needs services;
room and board expenses for students enrolled at least
room and board expenses for students enrolled at least
half-time.
half-time.
Time Limitation
Time limitation is determined by plan type and the state
Contributions must be made before beneficiary turns
in which it was opened. In prepaid tuition plans,
18; balance of account must be liquidated before
contributors generally purchase future education during
beneficiary turns 30, except for special-needs
a given period. Plans can be used only in the
beneficiaries.
predetermined period. In savings plans, there is typically
no program-imposed limit on how long the account may
remain open (as long as the beneficiary is living).
Who Manages Investments?
In prepaid tuition plans, the state plan administrator or
Plan contributor, beneficiary’s legal guardian, or other
college/university administrator fully manages
“responsible person” fully manages investments, similar
investments. In savings plans, the state plan
to an individual retirement account (IRA).
administrator or a private contractor develops a menu
of investment strategies, similar to many employer-
sponsored retirement plans.
Plan Ownership
In most plans, the contributor retains ownership of the
Beneficiary becomes owner of plan at age of majority
account.
(18 or 21 in most states).
Who Bears Risk?
In prepaid tuition plans, plans are backed by the full faith
Contributors bear the risk. Performance is determined
and credit of the state government, and therefore the
by the performance of the underlying assets and the
state bears the risk. In savings plans, contributors bear
price of education.
the risk. Performance is determined by the performance
of the underlying assets and the price of education.
Source: Internal Revenue Code (IRC) Sections 529-530; Internal Revenue Service, Publication 970: Tax Benefits for Education, 2018,
https://www.irs.gov/pub/irs-pdf/p970.pdf.
Margot L. Crandall-Hollick, Specialist in Public Finance
Joseph S. Hughes, Research Assistant
IF11254
Molly F. Sherlock, Specialist in Public Finance
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Major Features of 529 Plans and Coverdells
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