Education Savings Plans: Helping Families Compare Trump Accounts, 529, Coverdell

Executive Contacts

Tina Collins

Michelle Herrell

Jennifer Blackwood

Additional Contributors

Today, parents and grandparents who want to help a child get a financial head start with saving for education have many options. While college savings plans are often the first option that comes to mind, newer alternatives can help families save for a broader range of goals.

In this helpful guide, PYA compares several popular education savings accounts:

Trump Accounts as a broader, new option
529 Plans for a more traditional approach
State-managed 529 accounts with state-specific benefits
Coverdell Education Savings Accounts that include K-12 needs

to help families determine which option or combination of options aligns best with their financial goals.

Trump Accounts: Education and Beyond

Trump Accounts are a new type of savings account designed to help families build wealth for a child’s future major life milestones. Funds can generally be used for qualified expenses related to education, first-time homeownership, and entrepreneurship, with special tax advantages for these purposes.

To be eligible, the beneficiary must be a U.S. citizen under the age of 18. For children born between 2025 and 2028, the federal government may contribute an initial $1,000 deposit when the account is opened. Contributions are limited to $5,000 per year, and the funds cannot be accessed until the beneficiary reaches age 18. Because of this restriction, families should view a Trump Account as a long-term savings vehicle rather than a source of funds for current expenses.

Once the beneficiary turns 18, the account converts to a traditional IRA. At that point, withdrawals become available, but distributions used for non-qualified expenses, as well as earnings withdrawn beyond the account’s contribution basis, may be subject to ordinary income tax and other applicable IRA rules.

PYA Takeaway

For families seeking a savings option that extends beyond education expenses alone, a Trump Account may provide added flexibility. (Read PYA’s related article about Trump Accounts.)

529 Plans: Tax-Free Growth

Named after Section 529 of the Internal Revenue Code, a 529 Plan is specifically designed to help pay for education expenses. Contributions can be made regardless of income level, and families may also contribute to other educational savings accounts at the same time.

A 529 Plan has two main benefits: tax-free distributions (due to contributions being made with after-tax dollars) for qualifying expenses and a broad range of qualifying educational expenses:

College tuition and fees
College books and supplies
Certain apprenticeship program expenses
K-12 education expenses, including tuition at public, private, or religious schools, up to $10,000 per year

Because 529 Plans are designed specifically for education, they are generally best suited for families who are confident that the funds will eventually be used for school-related costs. If, however, the initial beneficiary will not be able to use some or all the funds for education, families have options so that the money saved does not go to waste:

Change the beneficiary: Under current law, families have the power to reassign the 529 Plan entirely to another eligible family member.
Pay down student loans: Up to $10,000 can be used to pay off qualified federal or private student loans for the beneficiary or their siblings.
Establish a Roth IRA rollover: Up to $35,000 of unused 529 Plan funds can be rolled over into a Roth IRA in the account beneficiary’s name.
Choose a cash-out option: Families can cash out the remaining unused funds; however, these funds are considered ordinary income and are subject to a 10% non-qualified distribution penalty charged by the IRS.

PYA Takeaway

A 529 Plan can be used for a wide range of qualified education expenses and is best suited for those who feel certain the money will be used for education, but even if the original beneficiary does not use the funds for education, families have flexible options with how to use those funds at a later date.

State-Managed Accounts: Diverse Approaches

Virtually all U.S. states and the District of Columbia offer 529 education savings accounts, and each is somewhat different. For Tennessee residents, the TNStars college savings program provides the benefits of a traditional 529 Plan while adding a unique state incentive, the Tennessee Investments Preparing Scholars (TIPS) program. Through TIPS, eligible families can receive matching contributions from the state at a rate of $4 for every $1 contributed, up to $500 per year. That means if a family contributes $25 each year, Tennessee will contribute $100 per year to the account.

To qualify for the TIPS match:

The child must be age 14 or younger.
The child must be a Tennessee resident.
Household income must fall below certain limits.

The income limits for this match begin at $52,875 for a two-person household, but families participating in certain assistance programs automatically qualify for TIPS. For qualifying Tennessee families, the matching contribution can significantly accelerate college savings and is one of the strongest reasons to open a TNStars account.

Tennessee is not the only state to have matching programs. Several states, including Kansas and Maryland, also offer matching programs, while states such as Massachusetts and Maine offer seed money benefits to start the accounts.

PYA Takeaway

Nearly every state offers a unique 529 plan that may have additional benefits such as seed money or fund matching.

Coverdell Education Savings Accounts: Flexibility for Education Types

Coverdell Education Savings Accounts (Coverdell ESAs) allow families to set aside money for a child’s K-12 and college expenses. Like a 529 Plan, contributions are made with after-tax dollars, and the account can grow tax-free if the money is later used for qualified education expenses. Each beneficiary has a maximum annual contribution limit of $2,000.

A major benefit of Coverdell ESAs is that funds may be used not only for higher education but also for a broad range of elementary and secondary school costs, such as tuition, books, supplies, tutoring, and educational technology. For families paying private school tuition or other school-related costs before college, this added flexibility can be helpful.

That flexibility comes with trade-offs:

Coverdell ESA contributions are subject to income limits.
Contributions generally stop once the beneficiary turns 18.
Funds generally need to be used by age 30 unless an exception applies.

PYA Takeaway

Because of these rules, Coverdell ESAs are often better suited for families who want a smaller, targeted education account rather than a large, long-term college savings vehicle.

Other savings vehicles exist that are not specifically designed for education purposes. Families should also consider savings for children that can be used for a variety of reasons at any time, such as custodial UTMA/UGMA accounts, brokerage accounts, and custodial Roth IRAs if the child has a source of earned income.

Which Education Savings Plan Option Makes the Most Sense?

Choosing the right education savings account starts with identifying the goal:

Trump Accounts may appeal to families who want to build savings that can eventually support broad adult expenses, such as education, housing, or other early-life needs.
If a family’s primary objective is education, a 529 Plan will likely be the most practical option because it allows for larger contributions, tax-free growth when used for qualified education expenses, and several options if funds are not fully used for school.
Most states offer 529 education savings plans to help families meet their goals. Families should check with their state for details.
Coverdell ESAs may still have a place for families who want a smaller, more targeted account with added flexibility for certain K–12 expenses, but the lower contribution limits and income restrictions make them less useful as a primary long-term savings vehicle.

For many families, the best approach may not be choosing just one account but using different tools for different purposes: a 529 Plan or Coverdell ESA for education-related goals and a Trump Account for broader financial flexibility. By matching the account to the intended purpose, families can create a more balanced approach that supports both a child’s education and their transition into adulthood.

How Families Can Get Started

It’s never too early or too late to save for education. Families should consider all savings options and assess their goals before embarking on a savings plan. PYA’s Tax experts are knowledgeable about all types of education savings methods.