Compare your options

Saving for college is challenging, and with so many options, finding the right savings vehicle is crucial. In addition to 529 plans, college savings alternatives include Coverdell education savings accounts, UGMA/UTMA accounts, Series EE and Series I Savings Bonds, and taxable investment accounts. While each of these savings strategies has its own distinctive features, there are benefits offered by 529 plans that exceed these alternatives.

529 savings plans

529 savings plans are sponsored by individual states and generally managed and marketed by private financial firms. They offer tax-deferred growth and any distributions used for qualified education expenses — tuition, fees, books, room and board — are federal income tax-free.1

Account holders of 529 plans can remove significant assets from their taxable estate without relinquishing control of those assets, and can change the beneficiary at any time.2 Parents, grandparents and other loved ones will also be able to make five years of gift contributions at once — up to $75,000 per beneficiary, or $150,000 per beneficiary if married filing jointly, without incurring a federal gift tax.3 And, 529 plans have high contribution limits — with John Hancock Freedom 529, the contribution limit is $475,000 per beneficiary.

Uniform Gift/Transfer to Minor Act (UGMA/UTMA) accounts

These accounts allow for contributions to a child with an adult acting as custodian until the child is no longer considered a minor. At age 18 through 21, depending on the state, the child owns and gains control of the account. These accounts are typically costly to the student in the financial aid equation.

Part or all of the investment earnings are exempt from federal income tax and some or all may be taxed at the child's rate which is generally lower. When an investment held by a child generates income in excess of the IRS threshold, what is known as the "kiddie tax" takes effect and part of the child's unearned income over the threshold amount could be taxed at the parent's rate. The "kiddie tax" rules apply to dependent full-time students under age 24 (previously, once the child turned 18 the kiddie tax rules disappeared and income above the threshold became taxable at the child's rate, not the parents' rate).4

Coverdell ESAs (Education Savings Account, formerly Education IRA)

They allow contributions of $2,000 a year per child for education (college or K-12) expenses. Earnings grow federally tax-free, and qualified distributions are federal income tax-free. Income limitations apply.

Regular mutual fund accounts in a parent's name

Taxable mutual funds offer flexibility and choice. Parents maintain control of the assets.

To see how John Hancock Freedom 529 stacks up, see our Comparison Chart.

1 State tax laws and treatment may vary. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax. Please consult your tax adviser for more information.

2 If the beneficiary is changed, the new beneficiary must be a member of the family of the current beneficiary.

3 The donor must elect that the gift be treated as having occurred over a five-year period in order for it to qualify for the federal gift tax exclusion. If additional gifts are made to the same beneficiary during this five-year period, a pro rata share will be included in the donor's estate for federal estate tax purposes. State gift and estate inheritance tax laws may vary.

4 Beginning in 2013, dependent full-time students under the age of 24 with no earned income, the first $1,000 of investment earnings (or other unearned income) is generally exempt from federal income tax. The next $1,000 is taxed at the child's rate and anything beyond $2,000 is taxed at the parents' ordinary income tax rate. Note: this is not meant as tax or legal advice. Please consult your tax adviser regarding your specific situation.

John Hancock Freedom 529 is distributed by John Hancock Distributors LLC, which is an affiliate of John Hancock Funds LLC, the distributor of John Hancock Investments.

There may be 529 plans offered by the account holder’s or beneficiary’s home state that offer potential state income tax or other state benefits, such as financial aid, scholarship funds, and protection from creditors, to its residents that should be considered before investing. Please call 866-626-8529 to obtain a Plan Disclosure Document or prospectus for any of the underlying funds. The Plan Disclosure Document contains complete details on investment objectives, risks, fees, charges, and expenses, as well as more information about municipal fund securities and the underlying investment companies that should be considered before investing. Your clients should read the Plan Disclosure Document carefully prior to investing.

John Hancock Freedom 529 is a college savings plan offered by the Education Trust of Alaska, managed by T. Rowe Price, and distributed by John Hancock Distributors LLC through other broker/dealers that have a selling agreement with John Hancock Distributors LLC. John Hancock Distributors LLC is a member of FINRA and is listed with the Municipal Securities Rulemaking Board (MSRB). © 2018. John Hancock. All rights reserved.


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