A couple earning $250,000 asks you about a Coverdell ESA for their newborn. They are completely ineligible, the joint phase-out ceiling is $220,000. Recommend it anyway and you have given advice that cannot be executed. The exam punishes that immediately.
HIGH-FREQUENCY: 529 rules (superfunding, qualified expenses, non-qualified penalties, and FAFSA treatment) are among the most tested education topics on the CFP exam.
Contributions grow tax-deferred. Withdrawals for qualified education expenses are completely federal-income-tax-free. Qualified expenses include tuition, mandatory fees, room and board (at least half-time enrollment), books, supplies, equipment, and computer technology. K-12 tuition has been a qualified 529 expense since 2018; the One Big Beautiful Bill Act (OBBBA) raised the annual per-beneficiary K-12 limit to $20,000 beginning in 2026 (up from $10,000) and broadened qualified K-12 expenses to include curriculum materials, online instruction, tutoring, dual-enrollment fees, and standardized test fees.
No federal income limits apply. No federal deduction exists, but over 30 states offer a state deduction or credit for contributions to their own plan.
Common mistakes
- Recommending a Coverdell without checking income. The phase-outs ($95,000, $110,000 single, $190,000, $220,000 joint) appear in the education phase-out table CFP Board provides during the exam, so there is no need to memorize them. What the exam tests is the habit of checking MAGI against that range before recommending the account.
- Taxing the entire non-qualified 529 withdrawal. The penalty and tax apply only to the earnings portion, calculated pro-rata, not the entire withdrawal. On a $50,000 withdrawal from a $200,000 account with $40,000 in earnings, the earnings portion is 20% of the withdrawal ($10,000). Trap: $50,000 as the taxable amount.
- Forgetting the 529-to-Roth rollover requirements. The account must be open at least 15 years. The $35,000 is a lifetime cap, not annual. Annual Roth contribution limits still apply. Earned income is required.
Bottom line
- 529 plans dominate: no income limits, tax-free qualified withdrawals, superfunding up to $95,000/$190,000, and a 5.64% FAFSA assessment
- Coverdell ESAs cap at $2,000/year per beneficiary and phase out at $110,000 single / $220,000 joint MAGI
- UTMA/UGMA carry the worst FAFSA treatment at 20%, trigger kiddie tax above $2,700, and give the child full control at majority
- Grandparent-owned 529s are invisible on the simplified FAFSA
Exam shortcut
When you see a high-income family, immediately check Coverdell eligibility: $110,000 single MAGI ceiling, $220,000 joint MAGI ceiling. Above it, Coverdell is off the table, that is almost always the tested trap.
The full lesson (about 3,578 words, 24 min read) adds 8 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B.14
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