Savings Options Comparison

Federal Income Tax

Non-deductible
contributions: federal
and Arizona income
tax-free when used for qualified higher
education expenses1

Non-deductible
contributions; federal
income tax-free when
used for qualified
higher education
expenses, or qualified
K-12 expenses

Tax-deferred for
federal; tax-free for
state; certain post-1989 EE and I bonds may be redeemed federal tax-free for qualified higher education expenses

Earnings and gains
taxed to minor; first
$850 of unearned income is tax exempt; unearned
income over $1700 for minors below age 18 on 12/31 taxed at parents rate

Earnings and gains
taxed in year realized; special
lower tax rates for
certain dividends and capital gains

Federal Gift Tax Treatment

Contributions treated
as completed gifts;
use $12,000 annual
exclusion, or up to
$60,000 with 5-year
election

Contributions treated
as completed gifts;
use $12,000 annual
exclusion. 5-year election only available under special circumstances

No gift involved;
qualifying bonds
must be owned by
the parent

Transfers treated as completed gift; use $12,000 annual gift exclusion

No gift involved;
direct payments of
tuition are not
considered gifts

Federal Estate Tax Treatment

Value removed from
donor's gross estate;
partial inclusion for
death during a 5-year
election period

Value removed from
donor's gross estate

Value included
in bondholder’s
gross estate

Value removed from donor's gross estate unless donor remains as custodian

Value included
in the owner's
gross estate

Maximum Investment

$304,000 per
beneficiary
(2006-2007 school year)

$2,000 per beneficiary
per year combined
from all sources

$60,000 face value
per year, $30,000 in
Treasury Direct and
$30,000 in paper
bonds, per owner,
per type of bond

No limit

No limit

Qualified Expenses

Tuition, fees, room
and board, books,
supplies, equipment,
and special needs

Same as 529 plan plus additional categories of K-12 expenses

Tuition and fees

No restrictions

No restrictions

Income Restrictions

None

Ability to contribute
phases out for incomes between $190,000 and
$220,000 (joint filers)

Interest exclusion
phases out for incomes between $94,700 and $124,700 (joint filers, year 2006)

None

None

Federal Financial Aid

Counted as asset
of parent or other
account owner;
not counted as
a student asset

Counted as asset
of parent or other
account owner;
not counted as
a student asset

Counted as asset
of bondholder

Counted as
student's asset

Counted as asset
of the owner

Use for Non-Qualifying Expenses

Withdrawn earnings
subject to federal tax
and 10% penalty

Withdrawn earnings
subject to federal tax
and 10% penalty

No penalty;
interest on redeemed bonds included in federal income

Funds must be
used for benefit
of the minor

Money can be
withdrawn at any
time for any reason