Guide to college savings plans and education savings accounts

An Ameriprise financial advisor can help you determine how much you'll need to save based on your priorities and situation. They can walk you through the common college savings plan options available at Ameriprise and also discuss alternative investing options that may work in your situation.

529 college savings plans

Investing in a 529 plan can help you save for the beneficiary’s qualified K-12 and postsecondary education expenses. 

• Earnings may be federal income tax-free if certain IRS requirements are met and when withdrawals are used for qualified postsecondary education expenses, including tuition, fees, books, certain equipment and the reasonable cost of room and board (for students enrolled at least half-time). Qualified distributions may also used for K-12 (public, private or religious elementary and secondary) tuition and certain other qualified education expenses at a maximum of $20,000 per beneficiary, per year (beginning in 2026).
• States sponsoring 529 college savings plans may offer their own tax benefits on 529 plan contributions, including income tax deductions, tax credits and other benefits such as matching grants.
• In many states, investors may be eligible for state tax benefits only if you invest in a plan sponsored by your state of residence or the state in which you pay taxes. However, there are certain states that offer tax benefits for contributions to 529 plans from any state.
• The earnings withdrawn from a 529 savings plan that are not used for qualified education expenses are generally subject to federal and state income tax and an additional 10% federal tax penalty on earnings. You should consult a tax specialist regarding your specific situation.
• Based on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of December 2019, qualified distributions from 529 plans can now be made for student loan repayment (up to $10,000 lifetime limit) for the account’s beneficiary and $10,000 lifetime limit for each of the beneficiary's siblings. You should consult a tax specialist regarding your specific situation.
• Under SECURE Act 2.0, beginning in 2024, certain 529 plan assets may be eligible for   tax-free transfer to a Roth IRA maintained for the benefit of the beneficiary, subject to conditions and criteria, including $35,000 lifetime limit. Additional requirements apply, including that the 529 account must generally have been maintained for at least 15 years, recent contributions may be ineligible, annual Roth IRA contribution limits apply, and the beneficiary must meet applicable income eligibility requirements.

Learn more about the ins and outs of 529 plan contributions and withdrawals.

Coverdell education savings accounts (CESA)

Save for your child’s elementary, secondary and college education expenses if IRS requirements are satisfied by contributing up to $2,000 per year per beneficiary before the child reaches age 18 (unless the child is a special needs beneficiary as defined by the federal government).

Withdrawals may be used tax-free for qualified education expenses, including tuition, fees, books, supplies, tutoring and computers and eligible elementary and postsecondary institutions. The child must use the funds before age 30 or the account balance may be subject to taxes and penalties, unless they are a special needs beneficiary.

• Contributions are not tax-deductible, but earnings are federal income tax-free when used for qualified education expenses.
• Eligibility phases out for joint filers with modified adjusted gross income between $190,000 and $220,000, and for single filers with modified adjusted gross income between $95,000 and $110,000.
• The earnings withdrawn from a Coverdell account that are not used for qualified education expenses are generally subject to ordinary income tax and an additional 10% tax. You should consult a tax specialist regarding your specific situation.

Get more information on Coverdell vs. 529 plans and other tax-advantaged ways to save for college here.

Take the next step towards education savings plans

While some people take out loans to pay for education expenses, the interest on qualified student loans may be deductible, subject to IRS rules, income limitations, and other eligibility requirements . Talk with an Ameriprise financial advisor before tapping your home equity, spending your retirement assets or using your credit cards to pay tuition. To find out more about the right education savings plan for you, contact your Ameriprise financial advisor or locate an advisor near you.