Education Savings Accounts

While most of this unit focuses on retirement, the Series 7 also tests two important education savings vehicles: Coverdell ESAs and 529 plans. Both offer tax-free growth for education expenses, but with very different limits and features.

Coverdell Education Savings Accounts

Coverdell ESAs are small, flexible education savings accounts:

• Maximum contribution: $2,000 per beneficiary per year
• Contributions are not tax-deductible
• Earnings grow tax-free if used for qualified education expenses (K-12 and post-secondary)
• Must be used by beneficiary's age 30 (or rolled to another family member's Coverdell)
• Contributor income limits (Modified Adjusted Gross Income (MAGI) phase-out):
  • Single: $95,000 - $110,000
  • Married filing jointly (MFJ): $190,000 - $220,000
• Can be used for a broader range of expenses than 529 plans (books, supplies, tutoring, uniforms for K-12)

Exam Tip: Gotchas

• Coverdell ESA limit is $2,000 per beneficiary per year. That is extremely small compared to 529 plans, which have no federal contribution limit.

529 Qualified Tuition Programs

529 plans are state-sponsored college savings plans with much higher capacity than Coverdell ESAs:

Contributions

• No federal contribution limits (subject to gift tax rules)
• Contributions over $19,000/year per beneficiary may trigger gift tax reporting
• 5-year gift tax averaging: A lump sum of up to $95,000 ($19,000 x 5) can be contributed at once and treated as spread over 5 years for gift tax purposes (MFJ: $190,000 combined)

Tax Treatment

• Earnings grow tax-free if used for qualified education expenses
• Qualified expenses include: tuition, room and board, books, computers, and up to $10,000/year for K-12 tuition
• Can be used for student loan repayment up to $10,000 lifetime per beneficiary
• Non-qualified withdrawals: Earnings subject to income tax plus 10% penalty

Exam Tip: Gotchas

• 529 plans have no federal contribution limit, but contributions over $19,000 per year may trigger gift tax reporting.
• 5-year gift tax averaging lets you front-load up to $95,000 ($19,000 x 5) into a 529 without gift tax.
• Non-qualified 529 withdrawals hit the earnings portion only: income tax plus a 10% penalty. Contributions come back tax-free.

Beneficiary Changes

• Beneficiary can be changed to another family member without tax consequences
• Broad definition of family member includes siblings, parents, children, nieces/nephews, first cousins, and in-laws

529-to-Roth IRA Rollover (SECURE 2.0)

Starting in 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary, subject to three requirements that must ALL be met:

1. The 529 account must have been open for at least 15 years
2. Only contributions made more than 5 years ago are eligible
3. Lifetime cap of $35,000 per beneficiary

Additional rules:

• Subject to annual Roth IRA contribution limits ($7,500 in 2026)
• Beneficiary must have earned income at least equal to the rollover amount
• Normal Roth income limits do not apply to 529-to-Roth rollovers

Exam Tip: Gotchas

• The 529-to-Roth IRA rollover has three separate requirements that must ALL be met: (1) 529 account open for 15+ years, (2) only contributions older than 5 years qualify, and (3) $35,000 lifetime cap per beneficiary. Missing any one disqualifies the rollover.

Coverdell vs. 529 Comparison