With so many ways to save for college, there’s a lot of information out there. View the comparison chart below to see how the CollegeCounts 529 Fund stacks up against other options.
|Key Factors||CollegeCounts 529 Fund||Coverdell Education Savings Account (ESA)||U.S. Savings Bonds||UGMA/UTMA||Mutual Funds|
$350,000 maximum account balance1
$2,000 per beneficiary per year
|$5,000 per individual per year2||None||None|
|Alabama state income tax-deductible contributions||
|Change of beneficiary allowed||Yes||Yes||N/A||No||N/A|
|Age restrictions for contributions||None||Before age 184||Purchaser must be 242||N/A5||None|
|Age restrictions for withdrawals||None||Before age 304||None||N/A5||None|
529 plans were created by section 529 of the Internal Revenue Code. A 529 savings plan is a qualified tuition program, sponsored by a state or state agency, designed to allow families a tax-advantaged way to save for college. A 529 college savings account provides federal tax advantages, potential state tax benefits, account control, and investment flexibility. Savings can be used at eligible institutions for tuition, fees, books, supplies, and equipment required for enrollment. Room and board is also a qualified education expense if the student is enrolled at least half-time.
A Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for education expenses. The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary must be under age 18 or be an individual with special needs.
Contributions to a Coverdell ESA are not tax-deductible, but amounts deposited in the account grow tax-free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses. There are contribution limits for taxpayers based on the contributor’s modified adjusted gross income.
EE bonds that are purchased electronically are sold at face value in amounts of $25 or more. The maximum investment amount in a calendar year is $5,000. These funds are issued electronically to a designated account.
Paper bonds are sold at half their face value; however, the bond is not worth face value until it has matured. Paper bonds are available for purchase in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. The maximum investment amount in a calendar year is $5,000. These bonds are issued as paper bond certificates.
If EE/E bonds are redeemed during the first five years, the three most-recent months’ interest is forfeited. There is no such penalty if the EE/E bonds are redeemed after five years.
For potential special tax treatment2 – The savings bond education tax exclusion permits qualified taxpayers to exclude from their gross income all or part of the interest paid upon the redemption of eligible Series EE and I Bonds issued after 1989 when the bond owner pays qualified higher education expenses at an eligible institution. To learn more, check with your tax advisor or see the Treasury Direct website.
The Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are custodial accounts that allow you to save for your child’s education or other purposes that benefit the child. Typically you cannot use the funds for items such as food, housing, clothing, or other parental obligations.
A custodial account is used to hold and protect assets for a minor until the age of majority is reached.5 As a custodial account the assets are held in the child’s name with an individual serving as custodian. They are irrevocable gifts to the minor. When the beneficiary attains the age of majority, the beneficiary gains control and can use the funds for any purpose.
UGMA and UTMA accounts are taxed at the child’s or the parent’s tax rate, depending on the amount of taxable income each year. Check with your tax advisor or investment professional for additional details.
Mutual funds are an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money—the fund’s assets—in stocks, bonds, or other investment securities. The fund manager then continues to buy and sell stocks and securities according to the style dictated by the fund’s prospectus.
Among the many types and styles of mutual funds are stock funds, bond funds, sector funds, money market funds, and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index funds). The availability of different types of funds allows you to build a diversified portfolio at low cost and without much difficulty. Mutual funds offer a simple, efficient way to invest for retirement, education, or other financial goals.
1The combined maximum account balance limit for the CollegeCounts 529 Fund and all other Section 529 programs established and maintained by the State of Alabama for a particular beneficiary cannot exceed $350,000. Although account balances can grow beyond that amount, no additional contributions can be made once the balance reaches $350,000.
2You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet certain conditions, including: you pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return; your modified adjusted gross income is less than $87,850 ($139,250 if married filing jointly or qualifying widow(er)) – 2012 limits; your filing status is not married filing separately; the U.S. savings bond is a series EE bond issued after 1989 or a series I bond; the savings bond must be issued in your name (as the sole owner) or in the name of both you and your spouse (as co-owners); and the owner must be at least 24 years old before the bond’s issue date. Please check with your tax advisor for details and information regarding your specific situation.
3A deduction, not to exceed $5,000 per taxpayer, is allowed as an adjustment to income on the Alabama income tax return for contributions made to the CollegeCounts 529 Fund or the PACT Program. The deduction may equal an amount up to $10,000 for married taxpayers filing a joint return where both taxpayers are making such contributions into the CollegeCounts 529 Fund or the PACT Program (closed to new investors).
4Contributions can be made for a beneficiary from birth to age 18. The account may remain open until the beneficiary reaches age 30, with certain limitations.
5Custodianship typically terminates when a minor reaches age 18 or 21.
6ESA eligibility phases out at $95,000–$110,000 adjusted gross income ($190,000– $220,000 for joint filers). Please check with your tax advisor for details and information regarding your specific situation.