Children’s Savings Accounts (CSAs) and 529 college savings plans both help families save for a child’s college education. While any amount of college savings is better than none, there are several key differences between these two types of college savings accounts. These differences affect how the account is opened, how funds grow and how the money may be spent when college bills are due.
What is a CSA?
CSAs are long-term savings accounts set up by cities, states and non-profit organizations to encourage low-income families to save for and enroll in postsecondary education. Some CSAs may be used to pay for primary or secondary school education expenses, the purchase of a home or business or saving for retirement. CSAs offer incentives such as seed deposits and/or matching funds made by the sponsoring organization to encourage participation.
One such program is the San Francisco Kindergarten to College (K2C) Program which began in 2011. Through a partnership with Citibank, the City of San Francisco opens and controls a deposit-only, non-interest account with a $50 seed for every kindergartener enrolled in the city’s public schools. Families are encouraged to contribute more money and earn additional incentives throughout the child’s primary and secondary school years.
The need for CSAs
The primary goal of a CSA is to teach children and families the benefits of saving for college. CSAs also help families develop responsible financial behaviors throughout their lives. Not only does this push low-income families to pursue a postsecondary education, but it also contributes to improved socio-economic prosperity.
A postsecondary education has become increasingly necessary for today’s students. The Center on Education and the Workforce at Georgetown University predicts that by 2020, two-thirds of jobs will require postsecondary education beyond high school. However, just over half of parents are saving for college according to Sallie Mae’s 2018 report, How America Saves for College.
Municipalities, public school districts and non-profit organizations have recognized this disconnect and are partnering with banks and other community organizations to establish CSA programs throughout the country.
Saving for education makes it more accessible
CSAs seem to foster a belief that college is accessible and affordable when savings are established, even if those savings are quite modest. Research conducted by the Center for Social Development at Washington University in St. Louis shows that low- and moderate-income children are more than four times as likely to enroll in college if they have even a small amount of college savings ($1 – $499). Furthermore, low- and moderate-income children who have savings of $500 or more are five times more likely to graduate from college than similar children with no savings account.
For first-generation college students and low-income families, CSAs present a simple introduction to the power of saving for postsecondary education. Incentivizing saving with seed grants and matching contributions make the process of saving more manageable and the benefits more transparent. In turn, students and families develop a stronger belief that they can make it to and through a postsecondary education.
CSAs vs 529 plans
Compared to 529 plans, CSAs have fewer restrictions on how funds are used. They also involve less risky investments given that they are FDIC-insured savings accounts and are not subject to market fluctuations. CSAs provide a local presence through participating banks. They give eligible savers incentives to encourage saving.
But, not everyone qualifies for a CSA. Many CSAs are available only to low-income families. CSAs are usually limited in geographic footprint, such as the residents of a specific city. CSA programs are available throughout the country.
529 plans offer a greater return on investment along with the greater complexity and greater risk of loss. Other important benefits of 529 plans include better financial aid and tax treatment of the savings.
Comparison of CSAs and 529 Plans
Children’s Savings Account
Postsecondary education, K-12 expenses, buying a home or small business, and saving for retirement. (Varies by CSA)
Postsecondary education and K-12 tuition expenses
There are no federal or state tax benefits for contributions, earnings or withdrawals.
Contributions are post-tax, like a Roth IRA, and are not deductible from federal income taxes.
Some states provide a state income tax deduction or tax credit for contributions to the state’s 529 plan.
Funds grow on a tax-deferred basis.
Qualified distributions are tax-free.
Some CSAs earn interest on the savings and some do not.
529 plans are invested in stock and bond mutual funds, and money market accounts. Some 529 plans are invested in FDIC-insured CDs.
Most 529 plans offer age-based asset allocations that shift the mix of investments from aggressive investments when the child is young to lower-risk investments as the college years approach.
The 529 plan account will fluctuate in value based on the performance of the investments. 529 plans can lose value.
Control, Contribution and Distribution
Some states and municipalities have universal CSAs that are created for a child based on a triggering event such as the application for a birth certificate or enrollment in a public school. Most programs require eligible participants to opt-in.
Most CSAs are under the control of the sponsoring organization.
There may be restrictions on how much can be contributed annually and in aggregate.
In most cases, personal contributions will be returned to the beneficiary at a certain age and may be used for any purpose, but incentive funds must be used for qualifying expenses that may differ based on the CSA.
529 plans are opt-in accounts.
The account owner remains in control of the account. Anybody can contribute to a 529 plan account.
There are no annual contribution limits, other than the annual gift tax exclusion. 5-year gift tax averaging allows lump sum contributions to be treated as occurring over a 5-year period.
Each state has a different aggregate contribution limit of several hundred thousand dollars. When this limit is reached, no further contributions are permitted.
Funds may be withdrawn for any reason. However, if funds are used for a non-qualifying expense, the earnings portion of the distribution will be subject to income taxes at the beneficiary’s rate and a 10% penalty. Non-qualified distributions may also be subject to recapture of state income tax benefits.
Qualified distributions may be used to pay for qualified expenses at any college that is eligible for federal student aid. There are otherwise no restrictions on the location of the college.
529 plans can be transferred among family members if the beneficiary is not going to use the funds.
Eligibility may be restricted based on where the family lives, family income level and the child’s age.
Everyone is eligible to invest in a 529 plan. Most states offer their own plans, but families can invest in any state’s 529 plan.