Education Savings
529 Plan
A state-sponsored account for education costs. Contributions aren't deductible on your federal return (some states offer their own deduction, though states with no income tax don't have one to offer). Money grows tax-deferred and comes out tax-free for qualified expenses: tuition, books, required equipment, room and board, apprenticeship programs, professional licensing exams, and up to $10,000 (lifetime) toward student loans.
Contributions above $19,000/year (2026) per recipient can trigger gift tax, though there's a one-time option to front-load up to $95,000 at once without a gift tax hit. You can change your investment choices twice a year, and move the account to a different state's plan once a year. Contributions count for the calendar year they're made in, so December 31 is the cutoff.
Two practical rules: match each withdrawal to a qualified expense paid in the same year and keep the receipts, and know that a scholarship doesn't trap the money. If your student earns one, you can withdraw an amount equal to the scholarship without the 10% penalty (the earnings are still taxed as income).
For families thinking about financial aid, a parent-owned 529 counts as a parental asset on the FAFSA, which is assessed at a much lower rate than student assets, and qualified withdrawals don't count as the student's income. Saving in a 529 hurts aid eligibility far less than many parents fear.
K-12 private and religious school tuition also qualifies, up to $20,000 a year, a limit recently raised from $10,000 under a 2025 law. One caveat: that higher limit is a federal rule, and not every state has adopted it, so if your state offers a 529 deduction, check how it treats K-12 withdrawals first. If your state has no income tax, it's a non-issue.
The money is also flexible if plans change. You can roll a 529 into a different family member's 529, and a newer option lets you roll unused funds into a Roth IRA for the beneficiary, up to $35,000 over their lifetime, as long as the 529 has been open at least 15 years. That Roth option is a useful answer to "what if my kid doesn't go to college" that didn't exist before 2024.
Coverdell ESA
$2,000/year per child, non-deductible, and contributions must stop once the child turns 18. Unlike a 529, contributions for a given tax year can be made until April 15 of the following year, the same deadline as an IRA. Contributors with higher household income (above roughly $220,000 in 2026) can't contribute directly. It covers K-12 and college expenses broadly: tuition, fees, books, supplies, equipment, tutoring, special needs services, and even computer equipment and internet access. Money must be fully used or rolled to another family member's Coverdell by the time the beneficiary turns 30.
Coverdell accounts are self-directed, so you can invest in individual stocks, bonds, mutual funds, and ETFs rather than being limited to a fixed menu. One thing worth knowing: you can't use a tax-free Coverdell distribution and claim an education tax credit (like the American Opportunity or Lifetime Learning Credit) for the same expense in the same year. Given the low contribution cap and income limit, a Coverdell tends to work best as a smaller, supplementary account.
529 vs. Coverdell
| 529 | Coverdell | |
|---|---|---|
| Annual limit | No federal cap | $2,000 per child |
| Income limit | None | Around $220k phaseout |
| Tax treatment | Tax-free for school | Same |
| Qualified expenses | College + K-12 tuition | College + broad K-12 |
| Investments | State plan menu | Self-directed |
| Age deadlines | None | Use by 30 |
| Leftover money | Roth IRA or another 529 | Family member's Coverdell |
| Best for | Primary account | Supplement |
Which is best?
For most families, the 529 is the account to open first: higher limits, no income restrictions, and a Roth IRA escape hatch for unused money. A Coverdell earns its place as a supplement, especially if you want to pick your own investments or expect significant K-12 costs. Many families use both.