Which account is right for your education savings goals?

529 college savings account

A savings plan sponsored by a state but generally open to anyone who wants to save for college.

State tax breaks

Yes. Depending on your state, contributions are often tax-deductible, and earnings grow tax-deferred.1 (Note that some states offer a tax credit instead of a tax deduction.) Withdrawals are tax-free when used for qualified higher-education expenses.2

Federal tax breaks

Yes. Earnings grow tax-deferred, and there's no federal tax on withdrawals used to pay for qualified education expenses.

Low impact on financial aid for higher education

Yes, almost always. Only about 5% of the money in these accounts is counted against federal financial aid, even if the student is also the account owner. However, if the account is owned by a student who is not claimed as a dependent or if the account is owned by someone else (grandparent, family friend, etc.), it could have a larger impact.

High contribution limits

Yes. The lifetime contribution limit per beneficiary is between $200,000 and $400,000, depending on the specific plan. You can contribute up to $75,000 ($150,000 if married and filing jointly) in a single year for each beneficiary without incurring gift taxes, as long as you don’t make any other financial gifts to that beneficiary for five years.

Earning potential

Yes. 529 plans offer a variety of investment portfolios to choose from, some of which are growth-oriented.

Access to your money

Yes. You can withdraw your money for any reason at any time, although you may pay taxes and a 10% penalty on the earnings portion of your withdrawal if you're not using the money for college.

Age-based options—designed for higher education

Yes. 529 plans are the only plans to offer these all-in-one investment options that are automatically rebalanced and managed for you over time.

Total flexibility

No. These accounts are meant to be used for college. However, you can use the money at a wide range of schools or transfer the account to a different beneficiary if you don't end up needing the money. Or you can withdraw your money for any reason and pay taxes and a 10% penalty on the earnings (but not on the contributions).3

Account control

Yes. You control the account, even after the person you're saving for reaches adulthood.

Get details on 529 plans

¹ The availability of tax or other benefits may be contingent on meeting other requirements.

² In the event the donor does not survive the 5-year period, a prorated amount will revert back to the donor's taxable estate.

³ If you received a tax deduction on your contributions, your state might require you to pay it back if you use the money for expenses that aren't qualified. Some states also adjust the amount owed for inflation.

For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Vanguard Marketing Corporation serves as distributor and underwriter for some 529 plans.

All investing is subject to risk, including the possible loss of the money you invest.

UGMA/UTMA account

A Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account established by an adult (custodian) for the benefit of a minor (owner). Account assets are gifts or transfers that cannot be revoked and must be used for the benefit of the minor. The custodian will control the assets until the beneficiary reaches adulthood. After that, the beneficiary can use the money for any purpose.

State tax breaks

Contributions to an UGMA/UTMA account aren't eligible to receive a state deduction or credit and account earnings won't be exempt from taxes. Earnings may be taxed at the child's rate instead of the parent's rate. Please consult a qualified tax advisor or the IRS for further information.

Federal tax breaks

Account earnings from these accounts aren't exempt from taxes. Earnings may be taxed at the child's rate instead of the parent's rate. Please consult a qualified tax advisor or the IRS for further information.

Impact on financial aid for higher education

Assets in an UGMA/UTMA account have significant impact on federal financial aid. The account belongs to the student (beneficiary), and a portion of the money in the account will count against federal financial aid for college.

High contribution limits

There is no limit to the amount of money that can be invested in an UGMA/UTMA account. However, a donor's contributions cannot exceed $15,000 a year ($30,000 for married couples filing jointly) without triggering gift tax rules.

Earning potential

The money within an UGMA/UTMA account can be invested in a large variety of securities, including growth-oriented investments like stocks.

Access to your money

The account belongs to the beneficiary (the person you open the account for), so assets must be used for their benefit until they reach adulthood (at which time the beneficiary will control the account).

Age-based options—Designed for higher education

Age-based options aren't available.

Total flexibility

These accounts are permanent gifts to the beneficiary and aren't specifically for college. The account custodian can invest and withdraw funds to use for the benefit of the beneficiary. Once the beneficiary reaches adulthood, they can use the money for anything.

Account control

The account custodian can invest and withdraw funds to use for the benefit of the beneficiary. Once the beneficiary reaches adulthood, they are entitled to control the money and can use it for any reason.

Under applicable UGMA/UTMA state law, the custodianship will terminate once the beneficiary reaches the relevant age (age of termination). It's mandated by state law that control be transferred to the beneficiary at adulthood.

If control isn't transferred to the beneficiary prior to the relevant age, Vanguard may restrict transaction access to the UGMA/UTMA account until the beneficiary takes control of the assets in accordance with applicable state law. If the account is restricted because of delay in transferring control, any restrictions would be lifted once ownership is transferred.

Learn more about UGMA/UTMA accounts

General investment account

An account that holds stocks, bonds, or mutual funds. The money can be used for anything.

State tax breaks

No. The money in these accounts receives no special state tax treatment. You'll pay tax on earnings as they accrue.

Federal tax breaks

No. The money in these accounts receives no special federal tax treatment. You'll pay tax on earnings as they accrue.

Low impact on financial aid for higher education

Yes, if you (as the parent) own the account, only about 5% of the money in these accounts is counted against financial aid.

High contribution limits

Yes. You can invest any amount.

Earning potential

Yes. You can invest the money in almost any type of security, including growth-oriented investments like stocks.

Access to your money

Yes. You can withdraw the money for any reason at any time.

Age-based options—designed for higher education

No. Age-based options aren't available.

Total flexibility

Yes. You can use the money for anything.

Account control

Yes. You control the account.

Learn more about accounts for general investing

Education savings account (ESA)

An account that can be used for any level of education (kindergarten through postsecondary).

Vanguard no longer opens new ESAs (also known as "Coverdell ESAs"), nor do we allow new ESAs to be created with money from an account transfer.

State tax breaks

No. The money in these accounts receives no special state tax treatment. You'll pay tax on earnings as they accrue.

Federal tax breaks

Yes. Earnings grow tax-deferred, and withdrawals are federal income tax-free when used for qualified education expenses.

Low impact on financial aid for higher education

Yes, almost always. Only about 5% of the money in these accounts is counted against federal financial aid, even if the student is also the account owner. However, if the account is owned by a student who is not claimed as a dependent, or if the account is owned by someone else (grandparent, family friend, etc.), it could have a larger impact.

High contribution limits

No. You can contribute a maximum of $2,000 each year per beneficiary (the person you're opening the account for).

Earning potential

Yes. You can invest the money in almost any type of security, including growth-oriented investments like stocks.

Access to your money

Yes. You can withdraw your money for any reason at any time, although you may pay taxes and a 10% penalty on the earnings portion of your withdrawal if you're not using the money for college.

Age-based options—designed for higher education

No. Age-based options aren't available.

Total flexibility

No, these accounts are meant to be used for education. However, you can use the money for elementary, secondary, and postsecondary education, or change the beneficiary if you don't end up needing the money. Or you can withdraw your money for any reason and pay taxes and a 10% penalty on the earnings (but not on the contributions).

Account control

Yes, for the most part, you control the account. However, once the beneficiary reaches age 30, if there's still money in the account, you'll have to give the money to him or her (and pay taxes and penalties) or roll it over to another beneficiary.

When must contributions stop?

No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary.

State tax breaks

The benefit

Pay less in taxes with tax-deferred earnings, tax-free withdrawals, and tax deductions or credits.

Some states have tax benefits for qualified higher-education expenses as described below. However, it's less clear whether account owners can receive a state tax break for K–12 tuition expenses. To find out if you qualify for a state benefit for K-12 tuition, check the state where you pay state income tax—even if another state sponsors your 529 plan. You should consult your tax advisor for further guidance.

How it works

• Tax-deferred earnings: You don't pay taxes on the money you earn until you take it out.
• Tax-free withdrawals: If you use the money for college expenses (which is the whole idea), you won't pay any taxes on the money you earn—ever.
• Tax deductions: Many states let you deduct your contributions (up to a certain amount) from state income tax, and some even offer a tax credit in the amount of your contribution.

Put these tax benefits together, and they make a big difference. If you put $25 a week into an account that offers a tax deduction, you'll save $65 on taxes that year if your state tax rate is 5%. If you put that $65 back into your college savings—and if the account is also state tax-deferred—you could accumulate an additional $3,500 for college after 18 years, vs. an account with no tax benefits.

See how much your state tax deduction could save you

This hypothetical illustration assumes an average annual return of 6%. It doesn't reflect any particular investment nor does it account for inflation or federal tax considerations. It also assumes that all withdrawals from the tax-deferred account are considered qualified. Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.

The assumed rate of return isn't guaranteed, and the results would be different given a different rate of return. When making an investment decision, you should consider your own timeline and income tax bracket, as the illustration may not reflect your situation.

Federal tax breaks

The benefit

Pay less in taxes with tax-deferred earnings and tax-free withdrawals.

How it works

• Tax-deferred earnings: You don't pay taxes on the money you earn until you take it out.
• Tax-free withdrawals: With some accounts, if you use the money for college or K–12 tuition, you won't pay any taxes on your earnings—ever. It can make a big difference.

For example, imagine you and your friend both open college savings accounts at the same time and contribute $25 a week for 18 years. You choose an account with federal tax benefits, while he opens an account with no tax breaks. When taxes are due on his earnings, he takes money out of the account to pay them.

If you both earn 6% a year on your investments, when it's time for college, you'll have about $3,800 more in your account!

This hypothetical illustration doesn't reflect any particular investment nor does it account for inflation or any state tax considerations. It assumes your friend pays 25% in federal income taxes on investment gains. (Note that investment gains may be taxed at a more favorable rate.) It also assumes that all withdrawals from the tax-deferred account are considered qualified. Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The assumed rate of return isn't guaranteed, and the results would be different given a different rate of return. When making an investment decision, you should consider your own timeline and income tax bracket, as the illustration may not reflect your situation.

Low impact on financial aid for higher education

The benefit

Have less of your savings count against your financial aid eligibility.

How it works

Accounts are treated differently when it comes to financial aid calculations. The federal government and your child's school might expect you to use anywhere from 0% to 20% of your savings to pay tuition, depending on your account type.

For example, imagine you have $60,000 saved for college when it's time to apply for financial aid. Those savings might not hurt your kid's financial aid eligibility at all—or they might chop it by $12,000 ($60,000 x 20%) in the first year alone.

High contribution limits

The benefit

Contribute an unlimited or large amount to the account without incurring taxes.

How it works

Some types of accounts put a limit on how much you can save for college in a single year.

Don't let your college plans be ruined by picking an account that can't handle the amount of money you plan to save!

Earning potential

The benefit

Give your money more potential to grow.

How it works

Saving enough money for college is tough, but it's easier when you have some help. If you put your money to work and allow it to earn even more money, it will get you a lot closer to your goal.

For example, imagine you saved $25 a week for 18 years and kept it in a bank account earning 1% annual interest. When it's time for college, you'd have about $25,750—the $23,400 you put in and about $2,350 in interest.

Now imagine you took a little more risk in an account that earned 6% a year. After 18 years, you'd have about $42,600 instead.

That's almost $17,000 in additional money your child can use for college!

Access to your money

The benefit

Get the value of your investment back at any time.

How it works

Some types of accounts are owned by the student you're saving for—so that money belongs to them, no matter what.

Target Enrollment Portfolios

The benefit

For your education savings goal, choose an all-in-one investment that will be rebalanced and managed for you over time.

How it works

With most types of accounts, you'll need to choose investments for your contributions, taking into consideration your time frame and the amount of risk you're willing to take. You'll then need to reevaluate your account once a year or so.

If that doesn't sound fun to you, think about choosing an account that offers Target Enrollment Portfolios. They make it easy to choose an investment based on the year you expect your beneficiary to start attending school—whenever that may be.

Total flexibility

The benefit

Use your money for anything, without penalty.

How it works

Accounts that offer you tax breaks for college savings generally (and not surprisingly) have a penalty if you don't use the money for qualified education expenses. So think about whether there's a high likelihood that you'll end up using the money for something else.

Account control

The benefit

Keep control of your money.

How it works

It's your money, so you should decide how it gets used, right?

For some types of accounts, it's not that simple. If control of the money is turned over to your child when he or she becomes an adult, it might get used for college … or it might not. Sports car, anyone?

Contributions

The yearly, monthly, or weekly amounts you save in your account.