Education Investing at Schwab
Schwab offers two convenient, tax-advantaged ways to save for qualified education expenses: the Schwab 529 Education Savings Plan and an education savings account (ESA). Contributions can be made to an ESA and a Schwab 529 Plan for the same student in the same year. Schwab also offers a Schwab One® Custodial Account, which can be used to support education expenses. Each option has different advantages:
- Schwab 529 Education Savings Plan: A 529 savings plan is a state-sponsored education savings program that allows individuals, regardless of their income or state residency, to set aside assets in a tax-deferred account to pay for a student's education expenses. The Schwab 529 Education Savings Plan is administered by the state of Kansas with American Century Investments® as the program manager.
- Education savings account: An ESA, sometimes called a Coverdell account, is a savings plan set up and managed by a parent or other adult for the benefit of a minor. Like a 529 savings plan, these tax-deferred accounts allow individuals to pay for a student's education expenses but have lower contribution limits than a 529 savings plan.
- Schwab One® Custodial Account (UGMA/UTMA): While not explicitly an education savings vehicle, a Schwab One® Custodial Account can be used to support education funding goals. The account is established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) and is used to pass irrevocable gifts to a minor or as a savings account for the child.
Compare the options
Compare the options
| Schwab 529 Education Savings Plan | Education savings account (Coverdell) | Schwab One Custodial Account (UGMA/UTMA) | |
|---|---|---|---|
| Primary goal | Save for elementary, secondary, or higher education expenses1 | Save for elementary, secondary, or higher education expenses | Save for a broad set of goals to the benefit of the minor |
| Tax advantages | Tax-deferred growth potential; tax-free qualified withdrawals2 | Tax-deferred growth potential; tax-free qualified withdrawals3 | Potential growth taxed at special rates4 |
| Contribution limit | $501,000 lifetime limit per beneficiary5 | Annual limit of $2,000 (income limits apply)6 | No limit |
| Gift limit without incurring gift tax | $95,000 ($190,000 joint) in a single year7 | $2,0008 | $19,000 per year ($38,000 joint) |
| Account ownership | Adult (or child if a custodial 529) | Adult, until assets are transferred to the student | Transfers to child at age 18 or 219 |
| Investing options | Choice of predefined asset-allocation portfolios | Open | Open |
| Financial aid impact | Minimal10 | Minimal11 | Potentially significant12 |
| Age limits | None; assets can be held indefinitely. | Contributions can be made until the beneficiary reaches age 18. Funds must be distributed to beneficiary by age 30. | Beneficiary must be under age 18 when account is opened. |
| Ability to change beneficiary | Anytime | Until beneficiary reaches age 30 | Never |
| Transfers | Rollovers permitted to other 529 plans or beneficiary's Roth IRA. Transfers to other accounts may be taxable. | Rollovers to 529 permitted if 529 is minor-owned. ESAs transferred to other accounts may be taxable. | Transfer to UGMA/UTMA 529 is permitted provided beneficiary remains the same. Transfers may be taxable. |
| More information | Schwab 529 Education Savings Plan | Schwab Education Savings Account (ESA) | Schwab Custodial Accounts (UGMA/UTMA) |
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Learn more about education investing
Learn more about the Schwab 529 Education Savings Plan and the investment options available to your clients.
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1. Qualified education expenses can include tuition, fees, books, supplies, equipment, and room and board. Certain costs associated with K-12 tuition and other expenses (ex. tutoring), participation in a registered apprenticeship program, postsecondary credentialing expenses if the beneficiary is enrolled in a recognized postsecondary credential program, or payment of a qualified education loan up to $10,000 may also be considered qualified educational expenses. The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distribution, or other factors. Clients should consult a qualified tax advisor to discuss their individual situation.
2. Same as above.
3. Same as above.
4. For a child under the age of 19 considered a dependent at the end of year (or a full-time college student under the age of 24), the first $1,350 of a child's unearned income is tax-free. The next $1,350 is taxed at the child's rate. Amounts over the $2,700 threshold will be taxed at the parent's tax rate. View Understanding the Kiddie Tax or IRS Form 8814 and IRS Form 8615 for instructions.
5. The contribution limit is reached when the entire value of all Kansas 529 Plans for one beneficiary reaches $501,000 through a combination of contributions and account appreciation. The State Treasurer may review and adjust the contribution limit as needed.
6. The contributor's adjusted gross income must be less than $95,000 ($190,000 per couple) to contribute $2,000. No contributions are allowed when the contributor's adjusted gross income is $110,000 ($220,000 per couple) or more.
7. A special gift-tax exclusion allows for contributions exempt from federal gift taxes of $95,000 ($190,000 per couple) per beneficiary in a single year. To qualify for the special gift-tax exclusion, you need to file a United States Gift-Tax Return form to treat the gift as if it were made in equal payments over five years. To avoid gift tax, you should make no additional gifts to the beneficiary during those five years. To qualify for gift-tax exclusion, contribution must be received by December 31. If you are a Kansas taxpayer and make a contribution between January 1 and the tax filing deadline, you are allowed to choose either the current tax year or previous tax year for the state income tax deduction.
8. Applies toward the annual gift-tax exclusion.
9. Generally, a child gains control of the account at age 18 or 21 (varies by state).
10. Parent-owned accounts are considered parental assets when calculating financial aid eligibility. Only 5.6% of parental assets and income are reflected in financial aid calculations. Financial impact depends upon the investor's financial situation.
11. Same as above.
12. 20% of the account value is considered to be the student's asset for financial aid calculations.
Before investing, carefully consider the plan's investment objectives, risks, charges, and expenses. This information and more about the plans can be found in the Schwab 529 Education Savings Plan Guide and Participation Agreement available from Charles Schwab & Co., Inc., and should be read carefully before investing.
The Schwab 529 Education Savings Plan is available through Charles Schwab & Co., Inc., and is managed by American Century Investment Management, Inc. The Plan was created by the Kansas State Legislature under the provisions of Section 529 of the Internal Revenue code and is administered by Kansas State Treasurer.
Notice: Accounts established under Schwab 529 Education Savings Plan and their earnings are neither insured nor guaranteed by the state of Kansas, the Kansas State Treasurer, American Century Investments or Charles Schwab & Co. Inc. Accounts established under Schwab 529 Education Savings Plan are domiciled at American Century Investments and not Schwab.
American Century Investment Services, Inc., Distributor and Underwriter.
This information is for educational purposes only and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, Financial Planner, or Investment Manager.