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Once you've decided to invest for college, the next step is to understand your choices. Review three popular plan types below.
529 plans are state-sponsored programs that allow you to contribute toward higher education goals for you, your children, grandchildren or other loved ones.
Coverdell accounts (also known as Coverdell ESAs or CESAs) are federally sponsored custodial accounts that allow an adult to open an account for students under the age of 18.
UTMAs allow minors to invest for any purpose—including education—and take advantage of children's taxation rates.
Qualified educational expenses at eligible 2- and 4-year colleges; graduate, vocational and technical schools; and tuition for K-12 education (check your plan for availability).
Qualified educational expenses at elementary, secondary schools and higher education.
Any purpose that benefits the child.
The plan can be transferred to a different beneficiary or withdrawn as a non-qualifying expense.
The money can be withdrawn as a non-qualifying expense.
The money is not limited to educational expenses, so there are no restrictions on how the money can be used.
Contributions may qualify for state tax deduction. Earnings also grow tax deferred at the federal and state levels.
The availability of tax or other state benefits (such as financial aid, scholarship funds and protection from creditors) may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distributions, or other factors. The earnings portion of nonqualified withdrawals is subject to federal and state income taxes and a 10% federal penalty.
Earnings grow tax deferred at the federal level.
Earnings, distributions and transactions are reported to the IRS under the minor's Social Security number and are taxed at the minor's tax rate.
The earnings portion of non-qualified withdrawals is subject to federal and state income taxes and a 10% federal penalty.
Withdrawals are tax free if used for qualified expenses. The money in the CESA must be used by the time a beneficiary reaches his or her 30th birthday.
Withdrawals are reported to the IRS under the minor's Social Security number and are taxed at the minor's tax rate.
Many plans have no minimum amount to open an account.
Contributions are capped at $2,000 a year per IRS rules. Although this does not meet our minimum, you may open your first account with $2,000 in a fund that typically has a $2,500 minimum.
You must meet the fund minimum, typically $2,500.
There are no age restrictions. Contributions may be made at any age of the beneficiary.
Contributions can only be made before the beneficiary reaches age 18.
Investments can only be made while the beneficiary is a minor (typically age 18).
There are no income restrictions.
Contributions may be limited or restricted depending on your income level.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.