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 (IRC Section 530)

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.

Section 529 Qualified Tuition Programs (IRC Section 529)

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