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Ways to save for college

When it comes to saving for college, it's important to choose the right investment plan. See how the main features differ between these four well-known college savings choices.
 

529 College Savings Plan UGMA / UTMA Coverdell Education Savings Account Regular Investment Account
Federal income tax free Yes. Money grows income tax free and qualified distributions are federal income tax free. No. Earnings are taxed at the parent's or the minor's rate. Yes. Money grows income tax free and qualified distributions are federal income tax free. No.
Maximum contribution Most plans allow account owners to contribute $300,000 (or more) per beneficiary.1 None. $2,000 per beneficiary, under age 18, per year.2 None.
Maximum income to qualify No limits. No limits. Phases out for single filers at $95,000 to $110,000; for joint filers at $190,000 to $220,000.3 No limits.
Who controls disbursement of assets? Plan owner. Custodian, until minor reaches age of majority (varies by state). Responsible individual. Registered owner.
Ability to change beneficiary In most instances, the beneficiary can be changed to another member of the beneficiary's family, without penalty. No. Can be transferred to the account of an eligible member of the same family without tax consequences. No named beneficiary; transfer may be considered a gift or sale.
Estate-planning features Assets are generally transferred out of the donor's estate, yet the donor retains control. Assets are transferred out of the donor's estate. Assets are transferred out of the donor's estate. Transfer or income may be considered gifts.
Freedom to choose colleges Can be used for qualified expenses at almost any accredited post-secondary school in the U.S. and many institutions outside the U.S. No restrictions on use. Can be used for any qualified education expenses in primary, secondary or post-secondary school. Must be used before beneficiary is age 30.2 No restrictions.
Early or nonqualified withdrawal Earnings are taxable and are subject to a 10% federal tax penalty, state taxes and penalties. No. Earnings are taxable and are subject to a 10% federal tax penalty, state taxes and penalties. No.
Investments available Multiple portfolio options, based on plan. Wide range of securities and personal property, as permitted by state law. Any legal security. Any legal security.

For 529 College Savings Plans:
Tax benefits are conditioned on meeting certain requirements. Federal income tax, a 10% federal tax penalty, and state income tax and penalties may apply to nonqualified withdrawals of earnings. Generation-skipping tax may apply to substantial transfers to a beneficiary at least two generations below the contributor. See the Investor Handbook for more complete information.

Investors should carefully consider college savings plan investment goals, risks, charges and expenses before investing. To obtain a disclosure document, which contains this and other information, talk to a financial advisor or call Franklin Templeton Distributors, Inc., the manager and underwriter for a 529 plan, at (877) 4NJ-BEST. You should read the disclosure document carefully before investing and consider whether your or the account beneficiary's home state offers any state tax or other benefits that are only available for investments in its qualified tuition program.  

  1. Source: savingforcollege.com, March, 2014.
  2. Except in the case of a Special Needs Beneficiary.