Five ways to save for a child's education
529 plans, Trump Accounts, Coverdell education savings accounts (ESAs), custodial Roth IRAs and UTMA/UGMA accounts, compared on the same five questions: how money gets in, who controls it, what it costs to take money out, what happens to what's left, and how it affects financial aid. Figures are for tax year 2026 and the 2027–28 aid year.
ImpactAdvisor LLC is an independent, fee-only fiduciary RIA in San Francisco. This is general information, simplified; check with your CPA or financial professional before acting.
Summary: key facts
Five ways to save for a child's education, compared on five questions.
| Account | Money in | Control | Taking it out | Left over | Aid |
|---|
| 529 plan (tax-free growth) | Anyone, no yearly cap* | The owner (usually a parent), permanently | Nothing, for education | Switch to another family member | Parent's, up to 5.64% |
| Trump Account (tax-deferred growth) | $5,000 a year per child, all givers | The child's; locked until 18 | Tax on all but family deposits, even for tuition | Works like a traditional IRA | Balance: no guidance yet; withdrawals count as income |
| Coverdell ESA (tax-free growth) | $2,000 a year per child under 18, all givers | A parent, until the child comes of age | Nothing, for education | Use or move by 30 | Parent's, up to 5.64% |
| Custodial Roth IRA (tax-free after 59½) | Up to the child's pay | The child's; managed to 18–21 | Contributions free; growth taxed before 59½ | Keeps growing for retirement | Balance not counted; withdrawals count as income |
| UTMA / UGMA (limited tax-free growth) | No limit | The child's; managed to 21 in most states | No rules; taxed every year | Theirs outright | Child's, 20% |
529 plan, yearly gift limits: No cap on deposits, but each one is a gift. A giver can put in $19,000 a year per child without a gift tax form, or $95,000 at once by spreading it over five years (the five-year option, often called superfunding, chosen on a gift tax form). Deposits stop at the state's balance ceiling, roughly $270,000 to $675,000. How gifts to a 529 work
Trump Account, free money: Beyond the government's $1,000 for children born 2025–2028, donors are adding money for some children: $250 from Michael and Susan Dell for most children born 2016–2024, gifts in some states and cities, and $1,000 matches from many employers. Who's giving what · Trump Account guide
Coverdell ESA, size and investments: Smallest limit, widest investment choice. Its $2,000 a year is the lowest limit of the five. But like a Roth IRA, it can hold any stocks, bonds or funds the provider offers, except life insurance. A 529 has its plan's menu, changed at most twice a year; a Trump Account, only U.S. stock index funds.
Coverdell ESA, last year to put money in: Deposits stop at the child's 18th birthday, unless the child has special needs. Until then, a year's $2,000 can go in up to the April tax deadline.
Coverdell ESA, income limit on givers: The only account with one. The $2,000 shrinks to zero as the giver's income rises from $95,000 to $110,000 single, or $190,000 to $220,000 joint.
UTMA / UGMA, tax while it grows: Taxed every year. The child's first $1,350 of investment income is untaxed, the next $1,350 is taxed at the child's rate, and above $2,700 at the parents'.
529 plan — Sources: 26 U.S.C. §529 · IRS Topic 313 (529 plans) · Savingforcollege: 529 limits by state (practitioner) · 26 U.S.C. §2503 · Rev. Proc. 2025-32 · Form 709 instructions · IRS Pub. 970 · FSA Handbook, reporting assets · 2027–28 SAI Guide
Trump Account — Sources: 26 U.S.C. §530A · IRS Notice 2025-68 · Proposed Trump Account rules (Mar. 2026) · Form 4547 instructions (Trump Accounts) · FSA Handbook, reporting assets
Coverdell ESA — Sources: 26 U.S.C. §530 · IRS Topic 310 (Coverdell) · IRS Form 5305-EA (model Coverdell agreement) · IRS Pub. 970 · 26 U.S.C. §529 · 26 U.S.C. §530A · 20 U.S.C. §1087vv (FAFSA income and assets) · 2027–28 SAI Guide
Custodial Roth IRA — Sources: 26 U.S.C. §408A · IRS Pub. 590-A · IRS Pub. 590-B (withdrawal order) · IRS Form 5305-RA (model Roth IRA custodial agreement) · FSA Handbook, reporting assets
UTMA / UGMA — Sources: 26 U.S.C. §2503 · UTMA §14 (Massachusetts text) · FinAid: UTMA ages by state (practitioner) · IRS Topic 553 (kiddie tax) · Rev. Proc. 2025-32 · Form 8615 instructions · FSA Handbook, reporting assets · 2027–28 SAI Guide
Who each account is for
529 plan: Saving steadily for a degree they expect
Parents of a 4-year-old. They can put away $1,000 a month.
Why: In a 529, growth isn't taxed when it pays for education, whatever the balance, and aid formulas count it lightly.
Limit: Money that doesn't go to education pays income tax plus 10% on the growth, plus 2.5% in California. Other states can take back a deduction.
Their numbers: $168,000 over 14 years
Fourteen years at $12,000 a year is $168,000 of deposits before any growth.
Why not the others. A Coverdell would cap them at $2,000 a year. A 4-year-old has no job, so no Roth. A Trump Account caps them at $5,000 a year and taxes the growth when it's withdrawn. A UTMA in an index fund would be taxed at their rate once it passed about $208,000, and it would count heavily against aid.
Check your state. Most states with an income tax, Illinois among them, give a deduction or credit for contributing, usually only for the state's own plan, each with its own limits (every state).
If the child doesn't need it all, they can switch the account to a sibling, a first cousin or themselves. Moving it into the child's own Roth IRA later is possible, within limits (question 4).
Sources: 26 U.S.C. §529 · IRS Topic 313 (529 plans) · IRS Pub. 970 · 26 U.S.C. §530A · IRS Topic 553 (kiddie tax) · FSA Handbook, reporting assets · 35 ILCS 5/203 (Illinois 529 deduction) · SEC Investor Bulletin: 529 plans
Trump Account: A newborn, and a family that can save a little
Parents of a baby born in March 2026. They can save about $150 a month.
Why: The government adds $1,000 for children born 2025–2028, if it's claimed.
Limit: Nothing comes out until the year the child turns 18. Then it works like a traditional IRA, and the growth and the government's $1,000 are taxed when withdrawn.
Their numbers, and what's settled
Their $1,800 a year is well under the $5,000 cap. A parent's employer can add up to $2,500 a year, but that counts toward the same $5,000.
Claiming the $1,000. An adult who expects the child to be their qualifying child for the year, usually a parent, elects it on Form 4547 or online. Eligibility depends on the child, not the parents' income. The child must be a U.S. citizen with a Social Security number.
They can open a 529 alongside it, now or later. The $1,000 is the reason to start here.
What's settled: accounts have taken deposits since July 4, 2026. What isn't: the detailed rules were proposed in March and August 2026 and could still change.
Sources: 26 U.S.C. §530A · 26 U.S.C. §6434 (the $1,000 pilot contribution) · Form 4547 instructions (Trump Accounts) · IRS: Trump Accounts (elect online) · Proposed employer-contribution rules (Aug. 2026) · Proposed Trump Account rules (Mar. 2026) · IRS Notice 2025-68
Coverdell ESA: Paying for private school now, and choosing their own investments
Parents of a 6th grader at a $9,500-a-year private school. They save about $2,000 a year and want to pick the exact funds.
Why: A Coverdell education savings account is like a Roth IRA, but for education: it can hold any stock or fund you choose, where a 529 limits you to the state plan's menu. The catch is the size: $2,000 a year per child.
Limit: $2,000 a year per child from everyone combined, nothing after 18, and it has to be used or moved by 30.
What a Coverdell still adds over a 529
From 2026 a 529 can pay up to $20,000 a year of K-12 costs, and since mid-2025 the list goes beyond tuition to include tutoring, books and test fees. What the Coverdell still adds is investment choice, plus a few K-12 costs a 529 doesn't cover: a computer, and uniforms or transportation the school requires.
These parents file jointly and earn under $190,000, so they can put in the full $2,000. For joint filers the $2,000 shrinks as income rises from $190,000 to $220,000, and is zero above that. The income test applies to whoever contributes, so a family that earns too much can have a grandparent, or anyone else under the limit, contribute instead.
Contributions stop at 18. Before 30, the balance can roll into a 529 for the same child. A 529 has no age limit.
Sources: 26 U.S.C. §530 · IRS Topic 310 (Coverdell) · IRS Pub. 970 · 26 U.S.C. §529 · P.L. 119-21 (2025)
Custodial Roth IRA: A minor reporting earned income
A 16-year-old with $6,200 of pay this year from a part-time job.
Why: Contributions can come out any time, tax-free, and the FAFSA doesn't count the balance, though money taken out counts as the student's income (question 5).
Limit: Contributions can't exceed what the child earned that year, and each year's contribution must be made by the next April's tax deadline.
Their numbers, and the paperwork
The parents can put in the $6,200 themselves, so the teen keeps the pay. The limit is the teen's earnings (and $7,500 in 2026), not whose money goes in.
Earnings mean pay for work actually done. Babysitting or yard work counts, with a record of dates, hours and who paid. Self-employment earnings of $400 or more in a year mean the teen must file a tax return.
The year money comes out, the child files Form 8606 to show how much of it was contributions.
Sources: 26 U.S.C. §408A · IRS Pub. 590-A · IRS: 2026 IRA limit $7,500 · IRS Pub. 501 · IRS Pub. 590-B (withdrawal order)
UTMA / UGMA: Money the child can use for anything, taxed lightly
High-income parents of a 10-year-old. They want to set aside $150,000 that might go to college, a business or a home.
Why: It can pay for anything that benefits the child, with no list of approved costs. In an index fund, an account this size pays little or no yearly tax, because a child's first $2,700 of investment income is taxed lightly.
Limit: The gift can't be taken back. The child controls it at 21 in most states, and it counts heavily against aid.
Their numbers, and how a child's investment income is taxed
If the fund pays 1.3% a year in dividends, $150,000 pays about $1,950 a year. The first $1,350 is untaxed. The other $600 falls in the second tier, where fund dividends are taxed at the child's own rate, which is 0%.
Putting in $150,000 is a gift above the $19,000-a-year allowance, so each of them files a gift tax form. No tax is due unless either one's lifetime gifts pass $15 million. Unlike a 529, a UTMA has no five-year option.
Most states hand a UTMA over at 21. Some let the donor choose a later age when the account is opened; Washington allows 25. Past 21, the gift may no longer count toward the $19,000 yearly allowance (hand-over age).
How much of a child's investment income is tax-free?
| Child's investment income, 2026 | Tax |
|---|
| First $1,350 | None. Covered by the child's standard deduction. |
| Next $1,350 | The child's own rate: 0% on most fund dividends and long-term gains, 10% on interest. |
| Above $2,700 | The parents' rate. Dividends and gains keep their lower capital-gains rate, usually 15%. |
The second $1,350 isn't exempt, but for an index fund the tax on it is often $0.
Filing. The child files a return once investment income passes $1,350. Parents can report it on their own return instead (Form 8814) if it's under $13,500 and all interest and dividends, with no wages and no gains from selling.
Form 8814 can cost more. On it the second tier is taxed at 10%, including dividends that would be taxed at 0% on the child's own return: up to $135 a year. Above $2,700 the gap can be larger, because the form adds the excess to the parents' income, which can reduce their credits and deductions or add the 3.8% tax on investment income.
If the child has a job. The standard deduction covers wages first. A child who earns $6,000 has only $450 of investment income left untaxed, not $1,350, and has to file once investment income passes $450.
Who it applies to: children under 18; and 18-year-olds and full-time students under 24, unless their own earnings are more than half their support.
How big can the account get before tax goes up? It depends on what it holds:
| Investment (yearly payout assumed) | Tax-free $1,350 used up at | Parents' rate starts at |
|---|
| US stock index fund (1.3%) | ≈ $104,000 | ≈ $208,000 |
| Dividend fund (2%) | ≈ $68,000 | ≈ $135,000 |
| Money market (4.3%) | ≈ $31,000 | ≈ $63,000 |
Selling investments creates gains that count too, so one large sale can cross $2,700 in a year the dividends alone wouldn't.
Sources: Rev. Proc. 2025-32 · IRS Topic 553 (kiddie tax) · Form 8615 instructions · Form 8814 instructions · IRS Pub. 501
Sources: 26 U.S.C. §2503 · Form 709 instructions · Uniform Transfers to Minors Act (1983, amended 1986) · FinAid: UTMA ages by state (practitioner) · RCW 11.114.200 (Washington hand-over age) · Rev. Proc. 2025-32
The accounts can be combined, such as a 529 for college plus a custodial Roth once a child has a job.
Question 1: How does money get in?
Some limits are per person giving. Others are per child, shared by everyone.
- 529 plan: Anyone, with no yearly cap. The plan stops taking deposits once the balance reaches its ceiling, roughly $270,000 to $675,000 depending on the state.
- Trump Account: $5,000 a year per child, from everyone combined, including up to $2,500 from a parent's employer (a limit per employee, not per child). The government's $1,000 doesn't count toward it, and neither do gifts a state or charity makes through the Treasury to a whole group of children (all children, a state, or birth years). Gifts limited by ZIP code or city aren't settled yet.
Beyond the family's own deposits, some children get money for free. Most of it arrives on its own once the child's account is activated, though the app may ask you to claim a gift; Oklahoma's needs an application. Each is a one-time gift, and much of it is still only promised. As of September 2026:
| Gift | For which children | Status |
|---|
| $1,000 from the U.S. Treasury | Born 2025–2028, U.S. citizens with a Social Security number. Claim it on Form 4547. | Law; deposits from July 4, 2026 |
| $250 from Michael and Susan Dell | Born 2016–2024, living in a ZIP code with a median family income of $150,000 or less: the first 25 million activated accounts. Check a ZIP code | Deposits began the week of Aug. 31, 2026 |
| $250 from Ray and Barbara Dalio | Connecticut children under 10 in ZIP codes with a median income under $150,000 | Pledged |
| $250 from Brad Gerstner | Indiana children born 2023 or 2024 in ZIP codes with a median family income of $150,000 or less | Paying from late September 2026 |
| $250 from the State of Oklahoma | Oklahoma children under 18 who are U.S. citizens with a Trump Account, about 50,000, paid in the order applications are verified. Apply to the State Treasurer. | Law; application not open yet |
| About $500 from an anonymous donor | Children born in San Francisco in 2026 | Pledged; no process published |
| $250 from Micron | Children in the counties around Micron's sites in California, Colorado, Idaho, Minnesota, New York, Texas and Virginia | Pledged |
| One SpaceX share from Gwynne and Robert Shotwell | Ages 11 to 17 in areas with lower household incomes, especially near central Texas | Pledged; how it's paid isn't settled, since the account can hold only index funds |
| An undisclosed amount from Kraken | Children born in Wyoming in 2026 | Pledged |
Employers. An employer can put up to $2,500 a year per employee into the employee's children's accounts tax-free, and it counts toward each child's $5,000 yearly limit. More than 50 companies have committed, many of them to matching the government's $1,000 for employees' children born 2025–2028, including JPMorganChase, Bank of America, Goldman Sachs, BlackRock, Charles Schwab, Visa, Dell Technologies, Intel, IBM, Delta and American Airlines. Ask HR.
Foster children. Under federal guidance from June 2026, a state's child welfare agency can open accounts for the children in its care, and states may add money, though none has to. Hawaii adds $250 for foster children 11 to 17, from a private foundation.
- Coverdell ESA: $2,000 a year per child, from everyone combined. Each giver's income must be under a limit. Money put in over either limit is taxed 6% a year until it's taken out.
- Custodial Roth IRA: Up to what the child earned from work that year, and no more than $7,500. Anyone can supply the money.
- UTMA / UGMA: No limit. Above $19,000 per giver per year, the giver files a gift tax form.
Sources: 26 U.S.C. §529 · Savingforcollege: 529 limits by state (practitioner) · 26 U.S.C. §530A · Form 4547 instructions (Trump Accounts) · Proposed employer-contribution rules (Aug. 2026) · 26 U.S.C. §530 · IRS Pub. 970 · IRS Topic 310 (Coverdell) · IRS: 2026 IRA limit $7,500 · IRS Pub. 590-A · 26 U.S.C. §2503 · Rev. Proc. 2025-32 · 20 U.S.C. §1087vv (FAFSA income and assets) · FSA Handbook, reporting assets · College Board: CSS Profile schools
Giving more than $19,000 a year
Going over the annual allowance doesn't create a tax bill. It means filing a gift tax form, and tax only starts after $15 million of lifetime giving.
Three ways to give more:
If the five-year option isn't chosen on the form for the year of the gift, the whole amount counts as a gift in that one year: $19,000 is covered by the yearly allowance and the rest comes off the $15 million lifetime amount. For $95,000 put in at once, that's $76,000 off the lifetime amount. With the option, it counts as $19,000 a year for five years, and nothing comes off the lifetime amount as long as you make no other gifts to that child in those years. No tax is due either way unless your lifetime gifts pass $15 million, and the form is required in both cases.
Sources: 26 U.S.C. §2503 · 26 U.S.C. §529 · Form 709 instructions · Rev. Proc. 2025-32
Your own 529 or your child's: what each means for gifts (unsettled)
Name the child once you know who the money is for. Each deposit counts as a gift to the child when you make it, usually covered by your $19,000 yearly allowance or the five-year option. Growth after that isn't counted as a gift unless the account is later moved a generation down. You stay in control as the owner.
Name yourself if the baby isn't born yet (a beneficiary needs a Social Security number) or you might use the money for your own courses. Money into your own 529 isn't a gift. Switching the beneficiary to your child later isn't taxed as income, but it is a gift: the whole balance on the day of the switch, growth included, counts as your gift that year. Above $19,000 it goes on a gift tax form, where you can also spread it with the five-year option or, if you're married, split it with your spouse. The longer you wait, the bigger that gift is likely to be.
Later switches. Moving the account to the beneficiary's sibling or first cousin isn't a gift. Moving it a generation down, such as from your child to your grandchild, is. Proposed IRS rules from 1998 count that gift as the old beneficiary's, even though the owner makes the change; in 2008 the IRS said it planned to count it as the owner's instead, and hasn't. Two generations down can also bring in generation-skipping tax.
Aid and state tax. On the FAFSA, a parent's 529 for the student, or one naming the parent, counts as a parent asset; a 529 for the student's brother or sister isn't reported. CSS Profile schools may count 529s for all the parents' children. Most states with an income tax give a deduction or credit for contributions, each with its own rules (every state).
At death. A 529 isn't counted in the owner's estate, with two exceptions. If the giver dies during a five-year gift, part of it counts in the giver's estate. And money paid out because the beneficiary died counts in the beneficiary's estate, so an account naming yourself can end up in yours.
A 529 the child owns (a custodial 529, usually made from a UTMA) is different: the money is the child's and the beneficiary can't be changed (question 2).
Sources: 26 U.S.C. §529 · Proposed Treas. Reg. §1.529-5 (1998) · IRS advance notice on 529 rules (2008) · Form 709 instructions · IRS Pub. 970 · Savingforcollege: a 529 before the baby is born (practitioner) · FSA Handbook, reporting assets · Finance Authority of Maine: CSS Profile walkthrough (state agency) · SEC Investor Bulletin: 529 plans
Parents and grandparents
A grandparent can give as much as a parent: $19,000 a year each, per grandchild. A 529 a grandparent owns isn't counted on the FAFSA, either as an asset or when money comes out; CSS Profile schools may count it (question 5).
The Coverdell income limit tests the giver
The $2,000 shrinks to zero between $95,000 and $110,000 of the giver's income single, $190,000 and $220,000 joint. A grandparent under the limit can contribute when the parents can't. The $2,000 is still shared.
Sources: 26 U.S.C. §530 · IRS Pub. 970
Gifts to a grandchild can bring in generation-skipping tax
Usually nothing is owed: each grandparent has a $15 million generation-skipping exemption, and gifts within the $19,000 yearly allowance don't use it. A five-year 529 gift counts as five yearly gifts for this tax too, as long as it's chosen on a gift tax form.
Tuition paid straight to the school is free of both gift tax and generation-skipping tax. A grandparent's unused generation-skipping exemption doesn't pass to their spouse at death.
Sources: 26 U.S.C. §2611(b)(1) · 26 U.S.C. §2613 (skip person) · 26 U.S.C. §2631 (GST exemption) · 26 U.S.C. §2642 · 26 U.S.C. §2503 · 26 U.S.C. §529 · Form 709 instructions · Rev. Proc. 2025-32
If a grandparent dies during a five-year 529 gift
The part of the gift assigned to years after the year of death counts in their estate. For example, with $95,000 given at once and death in year three, $38,000 counts.
Sources: 26 U.S.C. §529 · Proposed Treas. Reg. §1.529-5 (1998)
Name a successor owner on every 529, including a grandparent's
Without one, the account can go through probate, the court process for settling an estate. The choice matters for aid. If the parent, or a dependent student, takes over a grandparent's 529, it becomes a parent asset on the FAFSA and counts at up to 5.64%. Naming another relative, such as the other grandparent, keeps it off the FAFSA.
Sources: 26 U.S.C. §529 · 20 U.S.C. §1087vv (FAFSA income and assets) · FSA Handbook, reporting assets
Medicaid: gifts can delay long-term care coverage
Gifts made in the five years before applying for Medicaid long-term care can delay eligibility. The $19,000 gift tax allowance doesn't protect them. A 529 the grandparent still owns may count as the grandparent's asset. California looks back 30 months, and only at gifts made since January 1, 2026.
Sources: 42 U.S.C. §1396p(c) (Medicaid look-back) · SSA POMS SI 01140.150 (a 529 is its owner's resource) · California DHCS letter 25-18 (30-month look-back)
Don't be the custodian of a UTMA you funded
If the person who funded a UTMA is also its custodian and dies before the child takes over, it counts in their estate. Name someone other than the giver as custodian. For a grandparent's gift, that's usually a parent.
Sources: 26 U.S.C. §2038 · Stuit v. Commissioner, 54 T.C. 580 (1970) · Rev. Rul. 59-357 (Tax Notes, subscription) · The Tax Adviser: gifts to minors (practitioner)
Some states give the 529 deduction only to the account owner
Some states give the 529 deduction to anyone who contributes; others only to the account owner. A grandparent's deduction comes from the grandparent's own state, usually only for that state's plan. If that state is owner-only, the grandparent can open their own 529 for the grandchild.
Sources: Va. Code §58.1-322.03 (owner-only deduction) · 35 ILCS 5/203 (Illinois 529 deduction) · SEC Investor Bulletin: 529 plans
Trump Account: who can open it
Anyone can contribute. Under the proposed rules, the right to open it goes in order: a legal guardian, then a parent, an adult sibling and a grandparent. A grandparent can open it only if no one ahead is available. The exception: a grandparent the child lives with, who expects the child to be their qualifying child for the year, can open it while electing the $1,000. Whoever opens it manages it while the child is a minor.
Sources: Form 4547 instructions (Trump Accounts) · Proposed Trump Account rules (Mar. 2026) · IRS Notice 2025-68
Question 2: Who controls it?
Whose money it legally is, and when the child takes over.
- 529 plan: The account owner, usually a parent, permanently. The child is the beneficiary and has no legal claim. The owner can change the beneficiary or take the money back.
- Trump Account: The child's from the start, but no one can take money out until January of the year the child turns 18. While the child is a minor, the adult who opened it manages it.
- Coverdell ESA: A parent, until the child comes of age, usually 18, unless the account agreement keeps the parent in charge. Unlike a 529, the parent can't take the money back, and anything left at 30 is paid to the child.
- Custodial Roth IRA: The child's. A parent manages it until the child takes over, usually at 18 or 21 depending on the state and the IRA provider.
- UTMA / UGMA: The child's from the day it's funded. A custodian manages it until the hand-over age, usually 21. Then the child can spend it on anything. The gift can't be taken back.
Sources: 26 U.S.C. §529 · IRS Notice 2025-68 · Proposed Trump Account rules (Mar. 2026) · IRS Form 5305-EA (model Coverdell agreement) · 26 U.S.C. §530 · IRS Form 5305-RA (model Roth IRA custodial agreement) · UTMA §14 (Massachusetts text) · FinAid: UTMA ages by state (practitioner) · Nolo: all states now use UTMA (practitioner) · Savingforcollege: UTMA to 529 (practitioner)
Worth knowing: Moving a UTMA into a 529 doesn't give control back to the parent. The result is a custodial 529: the child still owns it, the beneficiary can't be changed, and it still hands over at the state's age. It does get the 529's tax treatment, but a 529 only takes cash, so the investments are sold first and the gain is taxed to the child.
Sources: 26 U.S.C. §529 · UTMA §14 (Massachusetts text) · Savingforcollege: UTMA to 529 (practitioner)
A UTMA hand-over age past 21 can cost the gift-tax allowance
A gift to a custodianship that ends by 21 counts as a present gift, so it qualifies for your $19,000-a-year allowance. Under that amount there's no gift tax form, and nothing comes off your $15 million lifetime amount. If a custodianship runs past 21, gifts to it can be treated as future gifts that don't qualify for the allowance. Then every dollar goes on a gift tax form and counts against the lifetime amount.
Where a later age is allowed. Washington hands a UTMA over at 21, but the donor can extend it to 25 when the account is opened. California hands it over at 18 unless the transfer names a later age. For a gift made during life, the latest age there is 21; 25 is allowed only for property that arrives through a will, a trust or a power of appointment.
If you want the money held longer than 21, a trust built for that purpose is the usual tool. Ask an estate lawyer.
Sources: 26 U.S.C. §2503 · RCW 11.114.200 (Washington hand-over age) · Cal. Prob. Code §3920.5 · The Tax Adviser: gifts to minors (practitioner) · Kitces on UTMA and 529 gifts (practitioner) · Form 709 instructions
Question 3: What does it cost to take money out?
A withdrawal can carry two charges: income tax on the growth, and a 10% penalty. The 529 and Coverdell drop both for education. Other exceptions, such as for a scholarship, drop only the penalty.
- 529 plan: Nothing, when spent on qualified costs: college, up to $20,000 a year of K-12, apprenticeships and some credential programs and exams.
- Trump Account: Income tax on everything except the family's own deposits, even for tuition: the growth, the government's $1,000, employer money, and state or donor gifts made to a whole group of children. From the year the child turns 18 it's a traditional IRA, and just like any IRA, paying for college removes only the penalty (10%-12.5%).
- Coverdell ESA: Nothing, for school from kindergarten through college.
- Custodial Roth IRA: Contributions come out first, and free. Growth, or earnings, taken out before 59½ is taxed, plus 10% unless it pays for college. That growth counts as the student's investment income, so the kiddie tax can apply: for a full-time student under 24 whose earnings aren't more than half their support, investment income above $2,700 is taxed at the parents' rate.
- UTMA / UGMA: No withdrawal rules. But it's the only one taxed every year while it grows, and selling investments to pay a bill creates a taxable gain in the child's name.
Sources: 26 U.S.C. §529 · P.L. 119-21 (2025) · IRS Topic 313 (529 plans) · IRS Topic 310 (Coverdell) · IRS Pub. 970 · 26 U.S.C. §72 · Form 5329 instructions (penalty exceptions) · IRS Notice 2025-68 · IRS Pub. 590-B (withdrawal order) · Form 8615 instructions
Worth knowing: If the child wins a scholarship, a matching amount can come out of a 529 without the 10% penalty. Income tax on the growth is still due.
Sources: 26 U.S.C. §529 · IRS Pub. 970 · Form 5329 instructions (penalty exceptions)
Question 4: What happens to what's left?
If the child doesn't go, or doesn't need it all.
- 529 plan: Switch it to someone else in the family, such as a sibling, first cousin, parent or future grandchild, with no deadline. It can also pay student loans or move into the child's Roth IRA, within limits.
- Trump Account: In January of the year the child turns 18, the special rules end and it works like any other traditional IRA in the child's name, the pre-tax kind, such as an IRA rolled over from an old 401(k), except that the family's own deposits were already taxed, so they come back out untaxed. Everything else is taxed as income, with a 10% penalty before 59½ unless an exception, such as college, applies.
Each withdrawal is part untaxed deposits and part taxable money, in proportion to what's in the account, so the deposits can't be taken out first. The taxable part is the government's $1,000, employer money, and state or donor gifts made to a whole group of children, plus all the growth. Gifts limited by ZIP code, such as the Dell $250, aren't settled yet.
- Coverdell ESA: Use it or move it by 30. Rolling it into a 529 for the same child before then removes the deadline.
Before the 30th birthday, whatever is left can:
Otherwise the balance is paid out to the child within 30 days of turning 30. The growth in it is taxed as their income, plus an extra 10%. None of this applies to a child with special needs.
- Custodial Roth IRA: They keep it, and it keeps growing as their retirement account.
- UTMA / UGMA: It's theirs at the hand-over age, to use for anything.
Sources: 26 U.S.C. §529 · IRS Topic 313 (529 plans) · 26 U.S.C. §529 with amendment notes · 26 U.S.C. §530 · IRS Pub. 970 · IRS Notice 2025-68 · CRS report R48910
Worth knowing: Switching a 529 to the beneficiary's sibling or first cousin is tax-free. Switching it to someone a generation younger, such as the beneficiary's own child, counts as a gift, and two or more generations younger can also bring in generation-skipping tax (how switches count as gifts).
Sources: 26 U.S.C. §529 · Proposed Treas. Reg. §1.529-5 (1998)
Other options for a 529 that isn't needed (unsettled)
Sources: 26 U.S.C. §529 with amendment notes · IRS Topic 313 (529 plans) · IRS Pub. 970 · IRS Pub. 590-A
Coverdell: for a child with special needs, the age limits don't apply (unsettled)
Deposits can continue after 18, nothing has to come out at 30, and the account can pass to a family member with special needs at any age. It can also pay for special needs services at school, K-12 or college.
Who qualifies isn't settled. The law leaves the definition to Treasury regulations, and none have been issued. Congress wrote in 2001 that it meant a child who, because of a physical, mental or emotional condition, including a learning disability, needs more time to finish their education. Ask the provider how it applies the rule before counting on it.
Sources: 26 U.S.C. §530 · IRS Pub. 970 · H.R. Rep. 107-84 (2001 conference report)
Question 5: How does it affect financial aid?
The FAFSA counts a parent's savings at up to 5.64% a year and a child's at 20%. The same money counts differently depending on whose name is on it.
- 529 plan: Counted as the parent's, at up to 5.64%, including a 529 the student owns if the student is a dependent. A parent's 529 for a brother or sister isn't reported, and a grandparent's isn't counted.
- Trump Account: Balance: unknown for now. Retirement accounts aren't counted, but no rule yet says whether this one is. Withdrawals count as the student's income on a later form, the untaxed deposits included, as with any IRA. (unsettled)
- Coverdell ESA: Counted as the parent's, like a 529.
- Custodial Roth IRA: The balance isn't counted. Money taken out counts as the student's income, contributions included: the FAFSA adds back the tax-free part. It shows up two years later, so withdrawals from January of the sophomore year of college on aren't on any FAFSA for a four-year degree. Student income above a $12,220 allowance is counted at 50%, more heavily than savings.
- UTMA / UGMA: Counted as the child's, at 20%, the most of the five. Selling to pay tuition also adds income on a later form.
Sources: 2027–28 SAI Guide · FSA Handbook, reporting assets · FSA Handbook, SAI chapter · 20 U.S.C. §1087vv (FAFSA income and assets) · 2027–28 need-analysis tables
Grandparent 529s: FAFSA and CSS Profile differ (unsettled)
A grandparent's 529 has never been reported as an asset on the FAFSA, and since the 2024–25 form, money taken from it isn't reported as the student's income. Before that, withdrawals could cut aid by up to half the amount.
The CSS Profile, used by about 200 mostly private colleges for their own aid, may still count a grandparent's 529 or the money taken from it. Each school sets its own rules, so if a student is applying to Profile schools, check before drawing on a grandparent's 529.
Sources: 20 U.S.C. §1087vv (FAFSA income and assets) · FSA Handbook, reporting assets · FSA Handbook 2023–24 (the old grandparent-529 rule) · College Board: CSS Profile schools
Moving a UTMA into a custodial 529 before applying for aid
A UTMA counts at 20% on the FAFSA. The same money in a custodial 529 for a dependent student counts as a parent asset, at up to 5.64%. The money still belongs to the child (question 2).
But a 529 only takes cash, so the investments are sold first and the gain is taxed to the child. Gains from January of the child's sophomore year of high school on also count as the student's income on the FAFSA. Start early and spread the sales over several years to keep more of the gain inside the child's first $2,700.
Sources: FSA Handbook, reporting assets · 20 U.S.C. §1087vv (FAFSA income and assets) · IRS Topic 553 (kiddie tax) · Savingforcollege: UTMA to 529 (practitioner)
What the chart leaves out: income
It only looks at savings. It asks nothing about income, household size or how many children are in college.
Income matters more than savings: a $10,000 raise costs about as much aid as $55,000 to $65,000 of extra savings. For a full estimate, use the Education Department's Federal Student Aid Estimator.
Sources: 2027–28 SAI Guide · FSA Handbook, SAI chapter · 2027–28 need-analysis tables
529 tax deductions and credits, by state
A state break only matters where the state taxes income. 37 states and D.C. give a deduction or credit for 529 contributions, most only for their own plan; 9 count any state's plan. A few of these breaks end or shrink at higher incomes: Delaware, Maine and New Jersey (above about $200,000 joint), and Minnesota's and Oregon's credits. California, Hawaii, Kentucky and North Carolina tax income but give no deduction or credit, and 9 states don't tax wages. No state taxes growth spent on college from its own plan. Two can tax it when the 529 is another state's, and some tax K-12, loan or Roth-rollover withdrawals federal law allows (which states).
| State | Deduction or credit for contributions | Income tax rates | Other state 529 benefits |
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| Alabama | Deduct up to $5,000 a year of contributions to Alabama's CollegeCounts plan ($10,000 joint if both spouses contribute). | 2%–5% | The CollegeCounts Scholarship, sponsored by the plan's board and administered by the State Treasurer, funds freshman-year college costs, selecting mainly on financial need; applicants need not own a 529 account. Rollovers from another state's 529 plan into CollegeCounts are exempt from Alabama income tax. |
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| Alaska | No state income tax, so no deduction to give. | None | Alaskans can direct their Permanent Fund Dividend into an Alaska 529 account; those who contribute half of their 2026 PFD are entered to win a $25,000 scholarship account. Dash to Save adds $250 to a new Alaska 529 account opened with at least $25 (lifetime cap $1,000 per beneficiary; no residency requirement; annual funding is capped). Participants in Alaska 529 for two or more years may be eligible for resident tuition at the University of Alaska, regardless of where they live. |
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| Arizona | Subtract up to $2,000 per beneficiary a year of contributions to any state's 529 plan ($4,000 joint); rollovers don't count. | 2.5% flat (2025) | The State Treasurer's yearly essay contest awards twenty $529 AZ529 contributions to Arizona 5th and 6th graders. |
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| Arkansas | Deduct up to $5,000 a year of contributions to Arkansas's plan ($10,000 joint), or $3,000 ($6,000 joint) to another state's plan; excess in-state contributions carry forward four years. | 2%–3.7% | Arkansas employers can take a business tax deduction of up to $500 per employee for matching contributions into an Arkansas Brighter Future 529 account. |
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| California | No deduction or credit for 529 contributions. | 1%–13.3% (2025) | CalKIDS deposits a state-funded scholarship account for every child born in California since July 1, 2022 ($100 for births since July 2023), with bonuses for claiming it and linking a ScholarShare 529. CalKIDS also gives $500 to low-income or English-learner public school students, with $500 more each for foster and homeless youth. |
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| Colorado | Deduct up to $26,200 per beneficiary a year of CollegeInvest contributions ($39,200 joint) in 2026; the cap is indexed yearly to college costs. | 4.4% flat (2025) | First Step gives $121 to a CollegeInvest account for any child born or adopted in Colorado since Jan 1, 2020 (enroll before age 8); parents enrolling by Dec 31, 2026 get a dollar-for-dollar match up to $500 a year for three years. The CollegeInvest Matching Grant matches savings up to $500 a year, up to three awards, for eligible lower- to middle-income account owners with children up to age 8. |
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| Connecticut | Deduct up to $5,000 a year of contributions to Connecticut's CHET plan ($10,000 joint); excess carries forward five years. | 2%–6.99% (2025) | CHET Baby Scholars puts a one-time $100 into a CHET account opened for a Connecticut child by the first birthday or within a year of adoption. Since 2025, employers get a tax credit of 25% of their contributions to an employee's CHET account, capped at $500 per employee per year. |
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| Delaware | Deduct up to $1,000 a year of DE529 contributions ($2,000 joint) if federal AGI is under $100,000 ($200,000 joint). | 2.2%–6.6% | First State, First Steps adds $100 to a new DE529 account for a Delaware child age five or younger when opened with at least $100, through Dec 31, 2026. |
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| District of Columbia | Account owners deduct up to $4,000 a year of DC College Savings Plan contributions ($8,000 joint if each spouse owns an account); excess carries forward five years. | 4%–10.75% (2025) | DC residents can enter a quarterly drawing in which the plan contributes $529 to the winner's DC College Savings account. |
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| Florida | No state income tax, so no deduction to give. | None | Florida's prepaid plan carries a statutory state backstop: the state agrees to meet the board's obligations to beneficiaries if the prepaid fund falls short. Project STARS buys Florida Prepaid plans as scholarships for low-income, at-risk students, funded by the Legislature and matched dollar-for-dollar by private donations. |
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| Georgia | Deduction up to $4,000 per beneficiary ($8,000 joint) for Path2College 529; for 2026-2030, up to half that for plans of states that reciprocate. | 4.99% flat | For tax years 2026 through 2030, contributions to another state's 529 plan are deductible up to $4,000 per beneficiary joint ($2,000 others) if that state gives its taxpayers a deduction for Path2College contributions; combined cap stays $8,000/$4,000. |
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| Hawaii | No state deduction or credit for 529 contributions. | 1.4%–11% | None beyond tax-free growth. |
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| Idaho | Deduction up to $6,000 ($12,000 joint) per year for contributions to Idaho's IDeal plan; other states' plans do not qualify. | 5.3% flat | Employers that contribute to employees' IDeal accounts get an Idaho credit of 20% of the contribution, capped at $500 per employee per year. |
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| Illinois | Deduction up to $10,000 ($20,000 joint) per year for contributions to Bright Start, Bright Directions or College Illinois; other states' plans do not qualify. | 4.95% flat | Illinois First Steps puts a one-time $50 seed deposit, claimable until age 10, for each child born or adopted to Illinois residents on or after Jan 1, 2023. Employers that match employees' contributions to Illinois plans may claim an Illinois tax credit for tax years ending on or before Dec 31, 2029. |
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| Indiana | Credit of 20% of contributions to Indiana529, up to $1,500 per return ($750 married filing separately); nonrefundable, no carryforward. | 2.95% flat | None beyond tax-free growth. |
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| Iowa | Account owners deduct up to $6,100 per beneficiary for 2026 (indexed yearly) for contributions to Iowa's ISave 529 or IAdvisor 529; other states' plans do not qualify. | 3.8% flat | Iowa exempts all ISave 529 earnings from state income tax, even on a nonqualified withdrawal; Iowa only recaptures previously deducted contributions. |
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| Kansas | Deduction up to $3,000 per beneficiary ($6,000 joint) for contributions to any state's 529 plan. | 5.2%–5.58% | Kansas's KIDS program matches up to $600 per beneficiary per year in 2026 and 2027 for Quest529 savers with household income at or below 200% of the federal poverty level. |
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| Kentucky | No state deduction or credit for 529 contributions. | 3.5% flat | A beneficiary who lives in Kentucky for 8 continuous years while named on an account with at least $2,400 of net contributions keeps in-state tuition rates at Kentucky public colleges even after moving away. KY Saves 529 balances are not counted when schools determine Kentucky need-based financial aid. |
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| Louisiana | Deduction up to $2,400 ($4,800 joint) per beneficiary for deposits to Louisiana's START plan; unused amounts carry forward to later years. | 3% flat | Louisiana adds an annual 'Earnings Enhancement' match to START deposits of 2% to 14%, set by the account owner's prior-year federal AGI (14% under $30,000; 2% at $100,000 and above); enhancements are forfeited on refunds. A START account balance has no effect on eligibility for Louisiana's TOPS (Taylor Opportunity Program for Students) award. A separate START K12 account (Louisiana K-12 tuition only) carries its own exemption of up to $1,200 per beneficiary ($2,400 joint). |
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| Maine | Deduction up to $1,000 per beneficiary for contributions to any state's 529 plan; not available if federal AGI exceeds $100,000 single or $200,000 joint. | 5.8%–9.15% | Every baby born a Maine resident is awarded a $500 Alfond Grant for future higher education (from the Alfond Scholarship Foundation, administered with FAME); families can add their own NextGen 529 account. FAME also adds matching grants to NextGen accounts of Maine residents, including a 30% NextStep Matching Grant up to $300 a year and a one-time $100 Initial Matching Grant. |
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| Maryland | Subtraction up to $2,500 per contributor per beneficiary for Maryland 529 contributions; spouses count separately; excess carries forward up to 10 years. | 2%–6.5% (2025) | Save4College State Contribution Program: Maryland deposits $250 or $500 into a Maryland College Investment Plan account for households with AGI up to $112,500 single or $175,000 joint (2026 application year). Payments on Maryland Prepaid College Trust contracts carry a separate subtraction of up to $2,500 per contract per year. |
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| Massachusetts | Deduction up to $1,000 ($2,000 joint) per return for contributions to Massachusetts' own programs (U.Fund 529 plan, U.Plan prepaid tuition). | 5% flat | BabySteps: every child born or adopted in Massachusetts can get a free $50 State Treasury deposit into a U.Fund account opened within one year of birth or adoption. |
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| Michigan | Deduction for contributions (net of qualified withdrawals) to Michigan's MESP or MI 529 Advisor Plan, up to $5,000 ($10,000 joint) per return. | 4.25% flat (2025) | Purchases of Michigan Education Trust (MET) prepaid tuition contracts are deductible at the full contract price in the year bought, separate from the MESP limit. |
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| Minnesota | A subtraction of up to $1,500 ($3,000 joint), with no income limit, or instead a credit of 50% of contributions up to $500, which phases out above $96,220 AGI (2025); any state's plan. | 5.35%–9.85% | None beyond tax-free growth. |
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| Mississippi | Deduction up to $10,000 ($20,000 joint) per year for contributions to Mississippi's MACS 529 plan; on a joint return one spouse may contribute the full amount. | 4% flat | Mississippi also runs MPACT, a state prepaid tuition plan for college tuition and mandatory fees, with enrollment September 1 to May 31 (newborns any time). |
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| Missouri | Deduction up to $8,000 ($16,000 joint) per year for contributions to Missouri's MOST 529 or any other state's 529 plan. | 2%–4.7% | None beyond tax-free growth. |
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| Montana | Deduct up to $4,600 per taxpayer ($9,200 joint) for contributions to any state's 529 plan in 2026; the cap is indexed to inflation yearly. | 4.7%–5.65% | Montana filers can send all or part of a state income tax refund directly into an existing Montana or other-state 529 account. |
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| Nebraska | Deduct up to $10,000 per return ($5,000 married filing separately) for contributions to Nebraska's NEST 529 plans only. | 2.46%–4.55% | The Meadowlark Savings Pledge puts a one-time $50 seed into a state-owned NEST 529 account for each Nebraska-resident baby born in 2020 or later. It can be used only at Nebraska institutions and only before age 30. A Low-Income Matching Scholarship adds matching contributions to eligible NEST beneficiaries' accounts, usable at Nebraska colleges and trade schools. Employers that match employees' NEST contributions can get a 25% incentive payment, up to $2,000 per employee. Employees can deduct up to $10,000 of employer contributions included in their income. |
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| Nevada | No state income tax, so no deduction to give. | None | Nevada College Kick Start opens a 529 scholarship account with a $50 deposit for every Nevada public-school kindergartner, funded from plan management fees. The Silver State Matching Grant matches Future Path 529 contributions dollar for dollar, up to $300 a year and $1,500 per beneficiary. It is for Nevada households with income of $74,999 or less and funds are limited. |
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| New Hampshire | No state income tax, so no deduction to give. | None | Fees assessed on New Hampshire's 529 plan fund a state endowment trust that pays scholarships to residents studying at in-state institutions. The scholarships do not depend on owning an account. |
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| New Jersey | Deduct up to $10,000 per return for NJBEST contributions if New Jersey gross income is $200,000 or less; other states' plans do not qualify. | 1.4%–10.75% (2025) | The NJBEST scholarship pays $2,000 to $6,000, depending on years open and contributions, to a beneficiary enrolling at a New Jersey college from an account open at least four years. Up to $25,000 in NJBEST savings is excluded when determining eligibility for New Jersey state financial aid. A one-time matching grant of up to $750 on the first deposit into accounts opened since June 29, 2021 is available for household AGI up to $75,000, subject to funding. |
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| New Mexico | Contributions to New Mexico's own 529 plans are fully deductible with no annual dollar cap; other states' plans do not qualify. | 1.5%–5.9% | By statute, New Mexico 529 contributions and earnings are excluded from any calculation of the beneficiary's student financial aid eligibility in New Mexico. The Saving for Success Award places $1,000 in a 529 account with The Education Plan for up to 50 New Mexico K-8 students a year, administered through the New Mexico Community Trust. |
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| New York | Account owners deduct up to $5,000 ($10,000 married filing jointly) a year for contributions to New York's 529 College Savings Program only. | 3.9%–10.9% | None beyond tax-free growth. |
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| North Carolina | No deduction or credit for 529 contributions; North Carolina's deduction was repealed starting with tax year 2014. | 3.99% flat | None beyond tax-free growth. |
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| North Dakota | Deduct up to $5,000 ($10,000 joint) a year of contributions to North Dakota's College SAVE plan; no carryforward, and rollovers in from other plans don't count. | 1.95%–2.5% (2025) | Bank of North Dakota matches up to $200 in contributions for a North Dakota newborn (under 12 months) in a College SAVE account, with no income limit. A $100 dollar-for-dollar Kindergarten Kickoff Match is available for a child entering kindergarten in North Dakota, contributed before age 7. A one-time $300 BND Match is available to North Dakota account owners with AGI up to $100,000 (single) or $150,000 (joint) for a beneficiary under 16. |
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| Ohio | Deduct up to $4,000 a year per beneficiary for contributions to any state's 529 plan (since 2023), with unlimited carryforward of the excess. | 2.75% flat | Ohio taxpayers can have their state tax refund deposited directly into an Ohio 529 account when they e-file. |
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| Oklahoma | Deduct up to $10,000 ($20,000 joint) a year of contributions to Oklahoma 529 plans, carrying any excess forward up to five years. | 2.5%–4.5% | None beyond tax-free growth. |
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| Oregon | Refundable credit of up to $190 ($380 joint) for 2026 contributions to Oregon's plans; the share of contributions credited falls as AGI rises. Limit is indexed yearly. | 4.75%–9.9% (2025) | Kinder Grad: families of Oregon kindergartners receive a $100 bonus when they open an Embark account with as little as $25. Baby Grad: an Oregon baby under one year old receives $100 when a new Embark account is opened for them. Oregon excludes Embark assets from most state-law eligibility determinations for public assistance or benefits, such as Medicaid (2018 SB 1544). |
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| Pennsylvania | Deduct contributions to any state's 529 plan up to the federal gift-tax annual exclusion per beneficiary, per contributor spouse: $19,000 in 2026. | 3.07% flat | Keystone Scholars gives a $100 scholarship account to every child born to or adopted by Pennsylvania residents in 2019 or later. PA 529 accounts are not counted for Pennsylvania state financial aid; other states' 529 plans are counted. PA 529 accounts are exempt from Pennsylvania inheritance tax and protected from creditors in Pennsylvania; out-of-state plans are not. |
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| Rhode Island | Account owners deduct up to $500 ($1,000 joint) a year of contributions to CollegeBound Saver; excess carries forward. Gifts from non-owners and rollovers in don't count. | 3.75%–5.99% | CollegeBound Starter deposits $100 into a CollegeBound Saver account opened for a Rhode Island child before the first birthday (or within a year of adoption). |
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| South Carolina | Contributions to South Carolina's Future Scholar plan are fully deductible, with no annual dollar cap beyond the plan's account-balance limit; contributions through April 15 count for the prior year. | 1.99%–5.21% | Future Scholar balances are not counted as an asset for need-based grants, scholarships or work programs run by South Carolina state agencies, unless the funding source requires it. PalmettoBaby: babies born in South Carolina on May 29 (529 Day) can receive a privately funded $529 grant in a new Future Scholar account. |
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| South Dakota | No state income tax, so no deduction to give. | None | None beyond tax-free growth. |
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| Tennessee | No state income tax, so no deduction to give. | None | Through the TIPS program, the state adds a 4-to-1 match to TNStars contributions for income-eligible resident children age 14 or younger, up to $500 a year and $1,500 lifetime. |
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| Texas | No state income tax, so no deduction to give. | None | Texas law says assets in a Texas College Savings Plan account are not counted when deciding eligibility for Texas-sponsored student financial aid. Texas also runs a prepaid plan, the Texas Tuition Promise Fund, whose assets are likewise excluded from Texas state-funded financial aid calculations. |
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| Utah | Nonrefundable credit of 4.45% on my529 contributions up to $2,560 per beneficiary ($5,120 joint) for 2026; the cap is indexed yearly. | 4.45% flat | Through Book Your Summer, my529 and the Utah State Library award $2,000 my529 scholarship accounts to Utah children in library summer reading programs. |
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| Vermont | Nonrefundable credit of 10% of the first $2,500 per taxpayer per beneficiary put into VT529, up to $250 ($500 joint); not indexed. | 3.35%–8.75% (2025) | None beyond tax-free growth. |
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| Virginia | Account owners deduct up to $4,000 a year per Virginia529 account, with unlimited carryforward; owners 70 or older may deduct everything they contribute that year. | 2%–5.75% | SOAR Virginia, run by the state's 529 administrator, is an early-commitment program giving participating high-school students advising and up to $2,000 in scholarship support. |
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| Washington | No tax on wage income, so no deduction to give. | None on wages | Washington's GET prepaid tuition plan, for state residents, is guaranteed to keep pace with in-state tuition increases. |
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| West Virginia | Contributions to West Virginia's SMART529 or prepaid plan are fully deductible, with no dollar cap; the deduction can be spread over up to five years. | 2.11%–4.58% | Through the Bright Babies program, SMART529 adds $100 when an account is opened for a West Virginia child before age one (or within a year of adoption), subject to available funds. State law bars counting a savings-plan account when calculating eligibility for West Virginia state student financial aid. |
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| Wisconsin | Deduct up to $5,280 per beneficiary for 2026 (same for joint filers) on Edvest or Tomorrow's Scholar contributions; indexed yearly, with excess carried forward. | 3.5%–7.65% (2025) | Employers that contribute to employees' Edvest accounts may take a state credit of 50% of the contribution, up to $840 per employee for 2026. |
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| Wyoming | No state income tax, so no deduction to give. | None | None beyond tax-free growth. |
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Does any state tax 529 growth that pays for education?
For college, only from another state's plan. Alabama taxes the growth in another state's 529 even when it pays for college; its own plans are exempt. Illinois adds it back unless the other state's plan follows national disclosure rules and tells Illinois residents about their in-state plans. Every other state with an income tax leaves growth spent on college untaxed.
For other uses federal law allows, some states tax the growth or take back the deduction. Taking back the deduction costs you only if you took it. Where a state hasn't said, it isn't listed; what each state takes back is in the spending section.
Sources: Alabama DOR: 529 Savings Plan FAQs (other states' plans are taxable) · 35 ILCS 5/203(a)(2)(D-20): Illinois add-back for other states' 529s
How hard is it to spend the money?
Four rules for tax-free withdrawals from a 529 or Coverdell:
1. Take the money out in the same calendar year you pay the bill
If the two fall in different years, part of the withdrawal can become taxable. For spring tuition billed in December, pay and withdraw in December, or pay and withdraw in January. Allow one to two weeks for the plan to pay.
Money withdrawn in the December after graduation, with no costs left that year, is taxable.
Sources: IRS Pub. 970 · New York 529 Direct Plan Disclosure Booklet
2. Don't use the same tuition for a tax credit and a tax-free withdrawal
The American Opportunity Tax Credit is worth up to $2,500 a year for four years, based on the first $4,000 of tuition, fees and course materials. Those dollars can't also be covered tax-free by a 529.
The credit shrinks to zero as income rises from $80,000 to $90,000 single, or $160,000 to $180,000 joint. If your income qualifies, pay $4,000 of tuition from other money and use the 529 for the rest. If it's too high, a student you don't claim as a dependent may be able to claim the credit on their own return.
Sources: IRS: education credits (AOTC and LLC) · IRS Pub. 970
3. Room and board is capped at the school's allowance
It's covered only for students enrolled at least half time, and only up to the room-and-board figure in the school's cost of attendance for the student's living arrangement, or the actual charge for school-owned housing. Off-campus rent above the allowance isn't covered. The financial aid office has the number.
Sources: IRS Pub. 970 · 26 U.S.C. §529
4. Whoever receives the money has to show what it paid for
A 529's 1099-Q goes to the student if the plan pays the school or the student, and to the owner if it pays the owner. A Coverdell's always goes to the student. Nothing reports what the money was for, so keep bills, receipts, the school's allowance and your own worksheet, by tax year.
Sources: Form 1099-Q instructions · IRS Pub. 970
Not covered: travel, a car, application fees, club dues
Travel to and from school, a car, college application fees, and club or Greek-life dues aren't qualified costs. Health insurance and student health fees are best paid from other money: the IRS hasn't said whether they count, even when the school requires them. A computer is covered if the student mainly uses it while enrolled.
Sources: 26 U.S.C. §529 · IRS Pub. 970
If the school refunds tuition a 529 paid, put it back within 60 days
It has to go into a 529 for the same child within 60 days of the refund, or it becomes taxable.
Sources: IRS Pub. 970 · 26 U.S.C. §529
State taxes on top: California's extra 2.5%, and deductions taken back
California adds its own tax on the growth in a withdrawal not spent on education: 2.5% on top of state income tax, and on a Coverdell too. No other state adds a tax on the growth itself; Alabama adds the withdrawal back to income, plus 10% of it, when it takes back its deduction. California also doesn't count K-12 costs, credential programs or a rollover to a Roth IRA as education, so those owe the 2.5% even where the federal 10% doesn't apply.
Elsewhere, a state takes back the tax break it gave. States that give a deduction or credit for 529 contributions can take it back if the money is used for something the state doesn't count. Some states don't count K-12 costs, student loans or Roth rollovers, even though federal law does. This can cost more than California's 2.5%, but only if you took the break:
Sources: California FTB: 2025 Form 3805P instructions (the 2.5% tax) · California FTB: 2025 Schedule CA (540) instructions (K-12 not qualified) · Indiana DOR Information Bulletin 98 (529 credit recapture) · Minnesota Revenue: 529 recapture tax · Minn. Stat. §290.06 subd. 2h (529 recapture) · 32 V.S.A. §5825a(b) (Vermont credit repayment) · Mont. Code §15-62-208 (recapture tax) · Alabama Dept. of Revenue: CollegeCounts recapture · New York 529 Direct Plan Disclosure Booklet
Can a parent pay tuition from a UTMA?
Yes. The custodian can spend UTMA money on anything for the child's benefit, including tuition, and can pay the school directly. There's no list of approved costs and no penalty. Four things to check first:
Sources: UTMA §14 (Massachusetts text) · UTMA §14 (North Carolina text)
1. Not for a bill you already owe, such as tuition a divorce decree makes you pay
State law says spending from a UTMA is in addition to, not instead of, a parent's duty to support the child. If a divorce decree or settlement already requires you to pay tuition, paying it from the child's account uses their money for your obligation, and the child can later sue to get it back.
For income tax, the account's income that is used to meet a parent's legal support obligation is taxed to the parent. Most states don't treat college as part of that obligation for married parents; New Jersey is the main exception. Several states, including Illinois, Connecticut, Massachusetts, New York and Washington, can order college support after a divorce. Pennsylvania passed such a law in 1993; its supreme court struck it down in 1995.
Sources: UTMA §14 (Massachusetts text) · Sutliff v. Sutliff (Pa. 1987) · IRS Pub. 550 · Newburgh v. Arrigo (N.J. 1982) · Braun v. Commissioner, T.C. Memo. 1984-285 · 750 ILCS 5/513 (Illinois) · Conn. Gen. Stat. §46b-56c · Mass. G.L. c. 208 §28 · N.Y. Domestic Relations Law §240 · RCW 26.19.090 (Washington) · Curtis v. Kline (Pa. 1995)
2. A school bill in the parent's name may shift the tax to the parent (unsettled)
In a 1964 federal case, a father was taxed on income from trusts he had set up for his children, because it paid school bills he was responsible for, whether he had signed a payment agreement or the school simply billed him. Whether this reaches a UTMA isn't settled. If a UTMA is paying, put the bill in the child's name where the school allows.
Sources: Morrill v. United States (D. Me. 1964)
3. Selling investments to pay creates a gain in the child's name
The gain is the child's investment income, so the kiddie tax applies: the parents' rate above $2,700 for a full-time student under 24. Example: selling an $80,000 UTMA with $50,000 of gain costs about $7,100 at a 15% capital-gains rate.
On the FAFSA, the gain counts as the student's income two years later. After the student's tax and a $12,220 allowance, half of the rest is added to the Student Aid Index. Selling a slice each year can keep each year's gain under the allowance. Selling everything at once doesn't lower the 20% count: the cash still counts until it's spent.
Sources: Form 8615 instructions · Rev. Proc. 2025-32 · 2027–28 SAI Guide · 20 U.S.C. §1087vv (FAFSA income and assets)
4. Paying from the UTMA can cost you the child as a dependent, and the tuition credit
If the UTMA pays more than half of the child's support in a year, the parents may not be able to claim the child as a dependent, or the education tax credit.
Sources: IRS Pub. 501 · 26 U.S.C. §152 (qualifying child) · IRS Pub. 970
Custodian rules: keep the account separate, and spend it on extras rather than basics
Pay from the UTMA itself or a bank account in its name, not your own checking, and keep a note of what each payment was for.
College tuition, camps, lessons and a computer are common uses; private K-12 tuition depends on the state. Food, housing, clothing and routine medical or dental care, braces included, are what parents are generally expected to provide.
Sources: UTMA §12, keep property separate (North Carolina text) · UTMA §14 (Massachusetts text) · AAML, Spending the Children's Money (practitioner) · Pa. R.C.P. 1910.16-6 (what child support covers)
For a child with a disability, it counts against SSI once it hands over
SSI doesn't count a UTMA funded by gifts as the child's asset until the account hands over. Before then, cash the custodian gives the child, or payments for the child's housing, can reduce SSI. After the hand-over, the whole balance counts, which can end SSI and the Medicaid that comes with it. Children's Medicaid based on family income has no asset test.
Sources: SSA POMS SI 01120.205 (UTMA and SSI) · SSA POMS SI SEA01120.205 (UTMA hand-over ages for SSI) · 42 U.S.C. §1396a(e)(14)(C) (no asset test for income-based Medicaid)
Pro tips
- Expecting a baby? Open a 529 with yourself as the beneficiary, then switch it to the baby once they have a Social Security number. The switch counts as your gift.
- Keep a 529 in your own name as a family account you can later switch to a child, niece or nephew.
- Child born 2025–2028? Claim the government's $1,000 for a Trump Account on Form 4547. It isn't automatic.
- A teenager with a job? Fund a custodial Roth up to what they earned that year (no more than $7,500 in 2026), and keep a record of the work.
- Name a successor owner on every 529. Without one, the account can go through probate.
- Don't be the custodian of a UTMA you funded. If you die before the child takes over, it counts in your estate.
- If you can choose a UTMA's hand-over age, keep it at 21 or younger. Past 21, gifts to it can lose the $19,000 yearly allowance.
- Using the five-year 529 option? Choose it on a gift tax form for the year you give, or the whole gift counts in that one year.
- Hold a UTMA in a broad index fund. It can grow to about $208,000 before its yearly income reaches the parents' rate, against about $63,000 in a money-market fund.
- File the child's own return when the income is fund dividends. Reporting it on yours with Form 8814 can cost up to $135 a year, and more above $2,700.
- Roll a Coverdell into a 529 for the same child before age 30. That removes the deadline.
- Child with special needs? A Coverdell can keep taking deposits after 18, and nothing has to come out at 30. Who qualifies isn't defined yet, so ask the provider.
- Grandparents: own the 529 yourselves, since it isn't counted on the FAFSA, or pay tuition straight to the school.
- Moving a UTMA into a custodial 529 for aid? For a dependent student it then counts at up to 5.64% instead of 20%. Start early: the investments are sold first, and gains from January of the sophomore year of high school on count as the student's income.
- If your income qualifies, pay $4,000 of tuition from other money to get the full American Opportunity Tax Credit.
- Withdraw in the same calendar year you pay the bill, or part of the withdrawal can become taxable.
- Won a scholarship? A 529 can pay out up to the same amount without the 10% penalty. Income tax on the growth still applies.
Why each account exists
529 plan — tax status for programs states already ran (1996)
By the mid-1990s several states ran prepaid-tuition programs, and it was unclear how they'd be taxed. The Small Business Job Protection Act of 1996 gave them tax-exempt status. It approved state programs rather than creating a federal account. As a result there's no federal yearly limit, there are more than 50 different plans, and each state sets its own balance ceiling.
Sources: P.L. 104-188 (1996) · Senate report 104-281 · GAO report on state tuition programs, 1995 · P.L. 107-16 (2001) · P.L. 109-280 §1304 (2006) · Joint Committee on Taxation on the 2017 act · 26 U.S.C. §529 with amendment notes · P.L. 119-21 (2025) · Federal Reserve: 529 plans by state
Coverdell education savings account (ESA) — started as the "Education IRA" (1997)
The Taxpayer Relief Act of 1997 created it for college costs only, with a $500 yearly limit. The 2001 tax act raised the limit to $2,000 and added K-12 costs, starting in 2002. It was renamed in 2001 for Senator Paul Coverdell of Georgia, who had pushed for the K-12 change and died in 2000.
It has age limits a 529 doesn't: contributions stop at 18, and the money must be used or moved by 30, unless the child has special needs. The $2,000 has never been adjusted for inflation.
Sources: P.L. 105-34 (1997) · P.L. 107-16 (2001) · P.L. 107-22 (Coverdell renaming) · S. 1133 (1997), Coverdell's K-12 bill · S. Res. 338 (2000), on Senator Coverdell's death · 26 U.S.C. §530
Custodial Roth IRA — a retirement account with no minimum age (1997)
The Roth IRA was created by the Taxpayer Relief Act of 1997 and named for Senator William Roth of Delaware. It's a retirement account, and it works for a child because there's no minimum age, only a requirement for earned income. The same law let IRA money pay for college without the 10% penalty, but the growth is still taxed.
Sources: P.L. 105-34 (1997) · CRS report RL34397 · 26 U.S.C. §408A · IRS Pub. 590-A
UTMA / UGMA — giving a child property without a trust (1956, 1983)
These are uniform laws written for states to adopt: the Uniform Gifts to Minors Act (1956) and the Uniform Transfers to Minors Act (1983). A child can own stock but can't manage or sell it, and a trust for a modest gift cost more than it was worth. These laws let an adult hold property for a child with a one-line registration.
So the gift is permanent, the account ends at a set age, and there are no rules about education.
Sources: Uniform Transfers to Minors Act (1983, amended 1986) · South Carolina Act 128 of 2022 (UTMA) · Nolo: all states now use UTMA (practitioner) · UTMA §14 (Massachusetts text)
Trump Account — a traditional IRA for children (2025)
Created on July 4, 2025, by P.L. 119-21, which added section 530A to the tax code. Legally it's a traditional IRA for a child under 18, with the government adding $1,000 for children born 2025–2028. Contributions began on July 4, 2026. The detailed rules are still proposed and could change.
Sources: P.L. 119-21 (2025) · 26 U.S.C. §530A · IRS Notice 2025-68 · Proposed Trump Account rules (Mar. 2026)
Related on this site: Step by step for high-income parents · Trump Account guide · Roth IRA and Backdoor Roth rules · Estate planning
Frequently asked questions
Trump Account vs 529: which is better for college savings?
They do different jobs. For education, a 529 has the edge: growth spent on education isn't taxed, there's no yearly cap, and the owner keeps control. Family and employer deposits into a Trump Account are capped at $5,000 a year, the money is locked until January of the year the child turns 18, and its growth, the government's $1,000 and employer money are taxed when withdrawn, even for tuition. Its edge is free money: the government's $1,000 for children born 2025–2028, if claimed, plus employer or donor gifts for some children. The two can be used together: a family can claim the $1,000 and save for education in a 529. How to open one and claim it: our Trump Account guide.
Which states give a tax deduction for 529 contributions?
37 states and D.C. give a deduction or credit for 529 contributions, most only for their own state's plan. Nine count any state's plan: Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio and Pennsylvania. Delaware, Maine and New Jersey give none above about $200,000 of joint income, and Minnesota's and Oregon's credits shrink as income rises. California, Hawaii, Kentucky and North Carolina tax income but give no deduction or credit, and nine states don't tax wages. Every state's limit and tax rates.
Do any states tax 529 money used for college?
Not from the state's own plan. Alabama taxes the growth in another state's 529 even when it pays for college, and Illinois adds it back unless the other state's plan meets its disclosure rules. Some states tax, or take back the deduction for, K-12, student-loan, credential or Roth-rollover withdrawals that federal law allows: which states.
Trump Account vs custodial Roth IRA: can my child have both?
Yes. Before the year a child turns 18, Trump Account deposits don't count toward their other IRA limits, so a working child can fund both. A Trump Account needs no earnings: it takes up to $5,000 a year, but nothing comes out until January of the year the child turns 18, and everything except deposits from family and friends is taxed when withdrawn. A custodial Roth IRA needs earned income: it takes only what the child earned, up to $7,500 in 2026, but contributions can come out any time, tax- and penalty-free, and qualified growth is tax-free.
What happens to a 529 if my child doesn't go to college?
The money can wait: federal law sets no age limit on a 529. The owner can switch the beneficiary to another family member, such as a sibling, first cousin or parent, with no income tax. It can also pay up to $10,000 of the beneficiary's student loans over their lifetime, or roll up to $35,000 into their Roth IRA, within limits. Money taken out for anything else owes income tax and a 10% penalty on the growth only, plus 2.5% in California, and some states take back a deduction they gave; deposits come back untaxed. If the child wins a scholarship, a matching amount can come out without the 10% penalty, though the growth is still taxed.
How does a 529-to-Roth IRA rollover work, and what is the 15-year rule?
Unused 529 money can move into the beneficiary's own Roth IRA: up to $35,000 over their lifetime, sent directly from the plan. The 529 must have been open at least 15 years, and money added in the last five years, with its growth, can't move. Each year is capped at the yearly IRA limit ($7,500 in 2026 for someone under 50), less other IRA contributions, and at what the beneficiary earned. The Roth income limit doesn't apply. The IRS hasn't said whether changing the beneficiary restarts the 15 years. California doesn't recognize the rollover: it taxes it like a withdrawal not spent on education, including its extra 2.5%.
What's the 529 contribution limit for 2026, and what is superfunding?
There's no yearly federal limit, but each deposit is a gift. In 2026 each giver can put in $19,000 per child without a gift tax form. They can also put in $95,000 at once by electing on Form 709 to spread it over five years, often called superfunding. Filing the form doesn't mean tax is owed: gift tax starts only after $15 million of lifetime giving. Deposits stop once the account reaches the plan's balance ceiling, roughly $270,000 to $675,000 depending on the state.
Are 529 contributions tax-deductible?
Not on your federal return. Most states with an income tax give a deduction or credit for contributing, usually only for their own plan, each with its own limits: every state. Some give it only to the account owner, and some take it back if the money is later spent on something the state doesn't count as education. The federal benefit comes on the way out: growth spent on education isn't taxed.
Can a 529 pay for private K-12 school in 2026?
Yes. From 2026 a 529 can pay up to $20,000 a year per student of K-12 costs, up from $10,000, and since mid-2025 the list goes beyond tuition to include tutoring, books and test fees. Check your state first: California doesn't count K-12 costs as education, so the growth in those withdrawals is taxed there, plus an extra 2.5%, and some states take back a deduction they gave. A Coverdell can also pay a few K-12 costs a 529 doesn't, such as a computer or required uniforms.
Does a 529 affect financial aid (FAFSA)?
Yes, but lightly. On the FAFSA a parent's 529 counts as a parent asset, at up to 5.64% of its value, and so does a 529 a dependent student owns. The same money in a UTMA counts as the child's, at 20%. A parent's 529 for the student's brother or sister isn't reported, though CSS Profile schools may count it. Income weighs more than savings: a $10,000 raise costs about as much aid as $55,000 to $65,000 of extra savings.
Does a grandparent's 529 count on the FAFSA?
No. A grandparent-owned 529 isn't reported as an asset, and since the 2024–25 FAFSA its withdrawals aren't reported as student income. CSS Profile schools may still count it or its withdrawals.
Can a parent pay college tuition from a UTMA account?
Yes. The custodian can spend UTMA money on anything for the child's benefit, including tuition, and can pay the school directly. There's no list of approved costs and no penalty. Before paying, check four things: whether the bill is one you already owe (for example under a divorce decree), whose name is on the school's bill, the gain from selling investments, and whether the payment could cost you the child as a dependent.
How much of a child's investment income is tax-free in 2026?
The first $1,350 is untaxed. The next $1,350 is taxed at the child's own rate: 0% on most fund dividends and long-term gains, 10% on interest. Above $2,700, the parents' rate applies.