Which account is right for your education savings goals?

529 education savings account

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

State tax breaks

Yes. Depending on your state, contributions are often tax-deductible, and any 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 education expenses.²

Federal tax breaks

Yes. Any 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 $235,000 and $550,000, depending on the specific plan. You can contribute up to $90,000 ($180,000 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 qualified education expenses.

Age-based options—designed for higher education

Yes. Many 529 plans 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 education. 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 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 $18,000 a year ($36000 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 age of majority (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 education. The account custodian can invest and withdraw funds to use for the benefit of the beneficiary. Once the beneficiary reaches age of majority, 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 the age of majority, 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. Any 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 qualified education expenses.

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

Some states have tax benefits for qualified education expenses, which are described below. To find out if you qualify for a state benefit for education expenses, check the state where you pay state income tax—even if another state sponsors your 529 plan. Consult your tax advisor for further guidance.

How it works

Many states allow you to deduct your contributions (up to a certain amount) from state income tax, and some even offer a tax credit for the amount you contribute.

Combined with federal tax benefits, these state tax benefits can make a big difference. For example, if you put $25 per 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 529 college savings account, you could accumulate an additional $3,500 for college after 18 years compared to 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.

Savings unlikely to impact financial aid

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 the account type and who owns it.

For example, assets in IRAs or other retirement accounts are typically excluded from financial aid calculations. Student-owned assets could reduce aid by up to 20% of their value, so for every $1,000 a student holds in an UGMA/UTMA or other investment account, aid could be reduced by up to $200. Parent-owned assets, whether in a 529 or another investment account, only reduce aid by up to 5.64%. So for every $1,000 in a 529, aid could be reduced by about $56.

If the 529 is owned by a grandparent or other relative, the assets generally don't factor into financial aid calculations at all.

Spending unlikely to reduce financial aid

The benefit

Prevent your spending from reducing financial aid eligibility.

How it works

Spending from a 529 account doesn't result in income that could lower financial aid.

Spending from some account types has the potential to increase income values used in financial aid formulas. If the investments in a taxable investment account, such as an UGMA/UTMA, have appreciated, the gains will be treated as income in the calculations and could reduce financial aid. Retirement account spending could have a significant impact because the full distribution amount is treated as income for financial aid purposes.

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 earned until you withdraw it.
• Tax-free withdrawals. With some accounts, if you use the money for qualified education expenses, you won't pay any taxes on your earnings—ever. It can make a big difference.

For example, imagine you and your friend each open college savings accounts at the same time and contribute $25 per week for 18 years. You choose an account with federal tax benefits, while they open one without tax breaks. When taxes are due on their earnings, they use money in their account to pay them.

If you both earn 6% per year on your investments, you'll have about $3,800 more in your account when it's time for college. That's just over three years' worth of books and supplies at a public or private 4-year institution.

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 large or unlimited amounts to the account.

How it works

Some account types limit how much you can save for education in a single year. Don't let an account with lower contribution limits get in the way of your education savings goals.

Earning potential

The benefit

Give your money more potential to grow.

How it works

Saving enough money for education is tough, but it can be easier when you have some help. Put your money to work and let compounding help get you closer to your goal.

For example, imagine you saved $3,000 each year for 18 years at a 6% rate of return. If you invested in a 529 account, you could have saved $103,453 for education.

This same investment, time frame, and rate of return in a taxable account could result in a balance of $77,790—over $25,000 less than in a 529 plan, as a result of capital gains and income taxes.

This hypothetical example of a long-term average return does not represent the return on any particular investment and the 6% rate is not guaranteed. It is an illustrative example of a long-term average return on a balanced investment of stocks and bonds. The account comparison assumes 4% annual capital and 2% annual income returns. After-tax return assumes a complete liquidation of the account, including applicable taxes. Calculations assume a 22% federal income tax and 5% state income tax, along with a combined 20% capital gains tax rate.

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

Select an all-in-one education savings investment that's automatically rebalanced and managed for you over time.

How it works

Target enrollment portfolios make it easy to consider an investment based on the year you expect your beneficiary to start attending school—whenever that may be. Target enrollment portfolios offer a diversified portfolio that adjusts its asset mix over time. As you get closer to the beneficiary's target enrollment date, the portfolio incrementally decreases exposure to stocks and increases exposure to bonds to reduce risk. 

Explore Vanguard Target Enrollment Portfolios

Spending flexibility

The benefit

Use your money for anything, at any time, without penalty.

How it works

Account types that offer tax incentives for savings will generally have a penalty if you don't use the money for qualified expenses. For 529 plans, qualified expenses generally include tuition, room and board, books, supplies, and other qualified expenses at any accredited vocational school, apprenticeship program, college, or graduate school in the United States or abroad. You can also use your 529 plan assets for K–12 tuition of up to $10,000 per student per year at a public, private, or religious school.

Residents of many states have additional flexibility and can also use 529 funds for up to $10,000 per year for tuition at qualified elementary or secondary schools, or to pay for up to $10,000 in student loan principal or interest.

Account control

The benefit

Retain control over your money.

How it works

It's your money, so you should decide how to use it, right?

For some account types, it's not that simple. If control of the money is turned over to your child when they become an adult, it might get used for college … or it might not.

Contributions

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