Major Features of 529 Plans and Coverdells
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Updated June 20, 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; see Table
elementary and secondary school expenses (elementary and
1.
secondary school expenses are not limited to tuition
expenses, as in the case of 529 plans). The tax advantages
529 Plans
of Coverdells are very similar to those of 529 plans. Unlike
With 529 plans, distributions (i.e., withdrawals) are tax-free
529 plans, annual contributions are limited to $2,000 per
(including any investment earnings) if they are used to pay
beneficiary across all Coverdell ESAs, and the ability to
for qualified higher education expenses. In addition, up to
make contributions is phased out for higher-income
$10,000 may be withdrawn tax-free per beneficiary per year
taxpayers. In contrast, 529 plans are typically capped only
and used for qualifying elementary and secondary school
by significantly higher lifetime contribution limits.
tuition expenses. If some or all of the distribution is used to
pay for nonqualified expenses, then the earnings portion of
There are also benefits to 529 plans and Coverdells outside
the distribution is taxable, and may be subject to a 10% tax
of the tax code. These plans are treated more favorably than
penalty.
other types of college savings or investments when
determining a student’s eligibility for federal need-based
Most 529 plans are 529 savings plans, in which a
student aid.
contributor invests in a portfolio of mutual funds or other
underlying investments. The savings and accumulated
More information can be found in CRS Report R42807,
investment earnings can be used to pay for qualified
Tax-Preferred College Savings Plans: An Introduction to
education expenses at a later point in time.
529 Plans, by Margot L. Crandall-Hollick, and CRS Report
R42809, Tax-Preferred College Savings Plans: An
Another less common type of 529 plan is a prepaid tuition
Introduction to Coverdells, by Margot L. Crandall-Hollick.
plan. In a prepaid plan, a contributor makes payments at
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) if
Excluded from gross income (exempt from income tax) if
distributed for qualified expenses; investment earnings are
distributed for qualified expenses; investment earnings are
subject to income tax and possibly a 10% penalty if not
subject to income tax and possibly a 10% penalty if not used
used for qualified expenses.
for qualified expenses.
Contribution Limit
No fixed contribution limit. Lifetime account balance limit
Annual limit of $2,000 per beneficiary, subject to phase-out if
set by state; ranged from $235,000 to $529,000 in 2018.
contributor’s income is between $95,000 and $110,000
(between $190,000 and $220,000 for joint filers).
Contributions in excess of $2,000 are subject to a 6% excise
tax.
https://crsreports.congress.gov
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 and
Contributions are treated as completed gifts; for 2018 and
2019, contributions of $15,000 or less are excluded from
2019, contributions of $15,000 or less are excluded from the
the gift tax. This amount is adjusted for inflation. A
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 tutoring,
and
tuition only.
and special-needs services. Room and board, uniforms, and
Secondary
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 for
Tuition, fees, books, supplies, and equipment required for
Education
enrollment; expenses for special-needs services; room and
enrollment; expenses for special needs services; room and
board expenses for students enrolled at least half-time.
board expenses for students enrolled at least half-time.
Time Limitation
Time limitation is determined by plan type and the state in
Contributions must be made before beneficiary turns 18;
which it was opened. In prepaid tuition plans, contributors
balance of account must be liquidated before beneficiary turns
generally purchase future education that can be used only
30, except for special-needs beneficiaries.
in the predetermined period. In savings plans, there is
typically no program-imposed limit on how long the
account may remain open.
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 investments.
“responsible person” fully manages investments, similar to an
In savings plans, the state plan administrator or a private
individual retirement account (IRA).
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 (18 or
account.
21 in most states).
Rollovers and Transfers
Distributions are not taxable if they are rolled over or
Distributions are not taxable if they are rolled over or
transferred to another 529 plan for the same beneficiary
transferred to another Coverdell for the same beneficiary or a
or a family member of the beneficiary.
family member of the beneficiary. Coverdell assets can be
rolled over to a 529 plan without incurring federal taxation.
Who Bears Risk?
In prepaid tuition plans, plans are backed by the full faith
Contributors bear the risk. Performance is determined by the
and credit of the state government, and therefore the state performance of the underlying assets and the price of
bears the risk. In savings plans, contributors bear the risk.
education.
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
https://crsreports.congress.gov
Major Features of 529 Plans and Coverdells
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11254 · VERSION 2 · UPDATED
Updated June 20, 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; see Table
elementary and secondary school expenses (elementary and
1.
secondary school expenses are not limited to tuition
expenses, as in the case of 529 plans). The tax advantages
529 Plans
of Coverdells are very similar to those of 529 plans. Unlike
With 529 plans, distributions (i.e., withdrawals) are tax-free
529 plans, annual contributions are limited to $2,000 per
(including any investment earnings) if they are used to pay
beneficiary across all Coverdell ESAs, and the ability to
for qualified higher education expenses. In addition, up to
make contributions is phased out for higher-income
$10,000 may be withdrawn tax-free per beneficiary per year
taxpayers. In contrast, 529 plans are typically capped only
and used for qualifying elementary and secondary school
by significantly higher lifetime contribution limits.
tuition expenses. If some or all of the distribution is used to
pay for nonqualified expenses, then the earnings portion of
There are also benefits to 529 plans and Coverdells outside
the distribution is taxable, and may be subject to a 10% tax
of the tax code. These plans are treated more favorably than
penalty.
other types of college savings or investments when
determining a student’s eligibility for federal need-based
Most 529 plans are 529 savings plans, in which a
student aid.
contributor invests in a portfolio of mutual funds or other
underlying investments. The savings and accumulated
More information can be found in CRS Report R42807,
investment earnings can be used to pay for qualified
Tax-Preferred College Savings Plans: An Introduction to
education expenses at a later point in time.
529 Plans, by Margot L. Crandall-Hollick, and CRS Report
R42809, Tax-Preferred College Savings Plans: An
Another less common type of 529 plan is a prepaid tuition
Introduction to Coverdells, by Margot L. Crandall-Hollick.
plan. In a prepaid plan, a contributor makes payments at
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) if
Excluded from gross income (exempt from income tax) if
distributed for qualified expenses; investment earnings are
distributed for qualified expenses; investment earnings are
subject to income tax and possibly a 10% penalty if not
subject to income tax and possibly a 10% penalty if not used
used for qualified expenses.
for qualified expenses.
Contribution Limit
No fixed contribution limit. Lifetime account balance limit
Annual limit of $2,000 per beneficiary, subject to phase-out if
set by state; ranged from $235,000 to $529,000 in 2018.
contributor’s income is between $95,000 and $110,000
(between $190,000 and $220,000 for joint filers).
Contributions in excess of $2,000 are subject to a 6% excise
tax.
https://crsreports.congress.gov
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 and
Contributions are treated as completed gifts; for 2018 and
2019, contributions of $15,000 or less are excluded from
2019, contributions of $15,000 or less are excluded from the
the gift tax. This amount is adjusted for inflation. A
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 tutoring,
and
tuition only.
and special-needs services. Room and board, uniforms, and
Secondary
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 for
Tuition, fees, books, supplies, and equipment required for
Education
enrollment; expenses for special-needs services; room and
enrollment; expenses for special needs services; room and
board expenses for students enrolled at least half-time.
board expenses for students enrolled at least half-time.
Time Limitation
Time limitation is determined by plan type and the state in
Contributions must be made before beneficiary turns 18;
which it was opened. In prepaid tuition plans, contributors
balance of account must be liquidated before beneficiary turns
generally purchase future education that can be used only
30, except for special-needs beneficiaries.
in the predetermined period. In savings plans, there is
typically no program-imposed limit on how long the
account may remain open.
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 investments.
“responsible person” fully manages investments, similar to an
In savings plans, the state plan administrator or a private
individual retirement account (IRA).
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 (18 or
account.
21 in most states).
Rollovers and Transfers
Distributions are not taxable if they are rolled over or
Distributions are not taxable if they are rolled over or
transferred to another 529 plan for the same beneficiary
transferred to another Coverdell for the same beneficiary or a
or a family member of the beneficiary.
family member of the beneficiary. Coverdell assets can be
rolled over to a 529 plan without incurring federal taxation.
Who Bears Risk?
In prepaid tuition plans, plans are backed by the full faith
Contributors bear the risk. Performance is determined by the
and credit of the state government, and therefore the state performance of the underlying assets and the price of
bears the risk. In savings plans, contributors bear the risk.
education.
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
https://crsreports.congress.gov
Major Features of 529 Plans and Coverdells
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11254 · VERSION 2 · UPDATED