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) must be memorized. Any family above the ceiling cannot contribute at all. Trap: a question about a $230,000 MAGI couple that lists Coverdell among the options is testing whether you know the $220,000 ceiling.
- 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 2,628 words, 18 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B.14
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