Advisor Services

To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Education Investing at Schwab

Member for

1 year 4 months
A063545
Submitted by Marc.Jones on Fri, 12/01/2017 - 14:58

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. While these accounts have lower contribution limits than a 529 account has, they can be used to pay for education expenses for students from kindergarten through college.
  • 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

 

Schwab 529 Education Savings Plan

Education savings account (Coverdell)

Schwab One Custodial Account (UGMA/UTMA)

Primary goal

Save for college expenses*

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 withdrawals*

Tax-deferred growth potential; tax-free qualified withdrawals*

Potential growth taxed at special rates

Contribution limit

$402,000 lifetime limit per beneficiary

Annual limit of $2,000 (income limits apply)§

No limit

Gift limit without incurring gift tax

$75,000 ($150,000 joint) in a single year**

$2,000††

$15,000 per year ($30,000 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 21‡‡

Investing options

Choice of predefined asset-allocation portfolios

Open

Open

Financial aid impact

Minimal§§

Minimal§§

Potentially significant***

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. 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

 

* The new Federal tax law expands the qualified use of 529 savings accounts by allowing withdrawals for K-12 tuition expenses, with a limit of $10,000 per year, per beneficiary. However, individual states may or may not adopt this expanded definition of qualified withdrawals. Clients should consult a qualified tax advisor to discuss their individual situation.

* Qualified education expenses can include tuition, fees, books, supplies, computers, equipment, and room and board. The earnings portion of a nonqualified withdrawal is subject to federal and state income tax and a 10% penalty. State tax treatment of earnings may vary. Check with your tax advisor for rules on your state's tax treatment. The availability of tax or other benefits may be conditioned on meeting certain requirements, such as residency, purpose for or timing of distribution, and other factors.

† For a child under age 19 (or under age 24 if a full-time student), the first $1,050 of earnings is tax-free, and the next $1,050 of earnings is taxed at the child's rate (usually 10%). Earnings over $2,100 are taxed at the rates that apply to trusts and estates.

‡ The contribution limit is reached when the entire value of all Kansas 529 plans for one beneficiary reaches $402,000 through a combination of contributions and account appreciation. The state treasurer may review and adjust the contribution limit as needed.

§ 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.

** To qualify for the special lump-sum gift-tax exclusion, you need to file a gift-tax return 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.

†† Applies toward the annual gift-tax exclusion.

‡‡ Generally, a child gains control of the account at age 18 or 21 (varies by state).

§§ 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.

*** 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 plan 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. If you are not a Kansas taxpayer, consider before investing whether your or the beneficiary's home state offers a 529 plan that provides its taxpayers with state tax and other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state’s qualified tuition program. Tax and financial aid treatment of 529 plans is subject to change. As with any investment, it is possible to lose money by investing in this plan.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the money market fund in which your investment option invests (the “underlying fund”) seeks to preserve its value at $1.00 per share, the underlying fund cannot guarantee it will do so. The underlying fund’s sponsor has no legal obligation to provide financial support to the underlying fund, and you should not expect that the sponsor will provide financial support to the underlying fund at any time.

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, Jake LaTurner. Notice: Accounts established under the 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 the Schwab 529 Education Savings Plan are domiciled at American Century Investments and not Schwab.

American Century Investments receives remuneration from fund companies, including American Beacon Advisors, Metropolitan West Management, LLC, and JP Morgan Funds for recordkeeping, shareholder services, and other administrative services associated with funds held in the Schwab 529 Education Savings Plan portfolios.

Schwab and the Plan’s Program Manager, American Century Investment Management, Inc., have designed the investment strategy and investment options to require or favor the selection of Schwab-affiliated funds, American Century funds, and certain third party mutual funds that have a business relationship with Schwab or American Century. Accordingly, there is a conflict of interest in the selection of the funds for the portfolios because Schwab, a Schwab affiliate, or American Century, respectively, earn more revenue as a result. The selection of specific mutual funds for the portfolios is subject to the oversight and approval of the Program Administrator. For more information on the financial arrangements between Schwab and the Program Manager, and between the Program Manager and the underlying funds, please see the “Fees and Expenses” section within the “Schwab 529 Education Savings Plan Guide and Participation Agreement.”

The Laudus Group® of Funds includes the Laudus Mondrian and Laudus U.S. Large Cap Growth Funds, which are part of the Laudus Trust and Laudus Institutional Trust and distributed by ALPS Distributors, Inc.; and the Laudus MarketMasters Funds®, which are part of the Schwab Capital Trust and distributed by Charles Schwab & Co., Inc. ALPS Distributors, Inc. and Charles Schwab Investment Management, Inc. are unaffiliated entities.

Information provided is for general purposes only and is not intended to be a substitute for specific individualized tax or legal advice. Where specific advice is necessary or appropriate, please consult a qualified tax or legal advisor.

American Century Investment Services, Inc., Distributor.

Show
Show Time
Hide
Yes