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Education investment options
Some of the more common investment options that can help parents save for college expenses are Coverdell Education Savings Accounts, Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts and Section 529 College Savings plans. Nationwide Funds offers the first two.

The table below compares and contrasts the pros, cons and options of these three plans.

  Coverdell Education Savings Account UGMA/UTMA Section 529
College plans
Definition Formerly know as the "Education IRA.” Works similarly to a Roth IRA but is earmarked for beneficiaries' education expenses. The Uniform Gifts/Transfers to Minors Act allows minors to own property. State-sponsored investment plan designed to encourage saving for college.
Ownership Minor
(beneficiary) 		Minor (with a custodian) Account owner
Investment options Broad range of investment options. Broad range of investment options. Age-based/
years-to-
enrollment and static portfolios. Some states also are permitting direct investments into mutual funds.
Fees Fees on mutual
funds held in the account are only those charged by the asset-
management firm. No additional fees. 		Fees on mutual funds held in the account are only those charged by the asset-
management firm. No additional fees. 		Fees on mutual funds held in the account are only those charged by the asset-
management firm. No additional fees.
Tax benefits Significant tax benefits if withdrawals are qualified. Investment earnings accumulate federal
-income-tax-
free until the money is withdrawn. 		If the child is younger than 14, earnings of more than $1,500 on the account are taxed at the parents' rate; if the child is older than 14, the child's tax rate is used. Significant tax benefits if withdrawals are qualified. Investment earnings accumulate federal-
income-tax-
free until the money is withdrawn.
Financial aid implications Could negatively affect the child's ability to obtain financial aid. Can still claim HOPE scholarship and Lifetime Learning Credits. Could negatively affect the child's ability to obtain financial aid. Less impact on child's ability to obtain financial aid.
Maximum contribution $2,000 per year No limit. Limit varies according to state statutes.
Withdrawal requirements Withdrawals are tax-
free. Funds must be used for qualified education expenses (tuition, fees, tutoring, books, supplies, related equipment, room and board, uniforms, transportation, extended day programs, computers, Internet access). 		Withdrawals can be used for any purpose, and no additional penalties or fines are levied. Capital gains are applied to appreciated property when/if sold. Qualified withdrawals are tax-free. Nonqualified withdrawals are penalized at a 10% federal tax rate (and possibly state tax rate) in addition to the standard federal tax rate of the account holder.
Pros
Assets can be used for primary or secondary education expenses. No earning restrictions. Anyone can contribute money on behalf of the beneficiary.
Works like an IRA; contributions can be made up to April 15 of the following year. Easy to open. Can gift up to $55,000 a year per child without triggering gift tax (gift assumed to be $11,000 ratably over five years).
Once earning requirements are met, anyone can contribute. Less expensive to set up than trusts. Can contribute to both a Coverdell Education Savings Plan and Section 529 College Savings plan.
To avoid taxation, accounts may be rolled into another family member's Coverdell account Possible lower tax on dividends and long-term capital gains. Donor retains control of account. If beneficiary doesn't go to college or use all funds that were set aside, donor gets the money back (taxes would be owed on the earnings and a 10% penalty would apply).
Cons
Contributions limited to $2,000 per year. If the custodian of the account dies, the account becomes part of that person's taxable estate. Limited to investment options offered by the plan.
Contributions will be limited if certain earning levels are exceeded. Account must be terminated when the child reaches the age of majority; the age varies by state from 18 to 21. Assets within the plan may be tapped by Medicaid if donor requires certain services.
Money must be used by age 30, or earnings are taxed as ordinary income plus a 10% penalty. When the account is terminated, the child takes control of the account; custodian cannot take any of the money back. Nonqualified withdrawals will be taxed on earnings and incur a 10% penalty. Exceptions include death, disability of the beneficiary or if the beneficiary receives a scholarship.

NOTE: Please consult your tax professional regarding your specific needs.

Pages in this section:
•Education investment options
•Coverdell ESA overview
Other pages of interest:
•Open an education account
•Coverdell ESA Calculator
•Fund information
•How to invest