When it comes to saving for  future education expenses, a 529 education savings plan is a powerful savings tool available for families. A 529 plan offers tax-free growth, tax-free withdrawals for a wide variety of qualified education expenses, and, for New Mexico residents, a state tax deduction on every dollar contributed. 

Other options — Coverdell Education Savings Accounts (ESAs), Uniform Gifts to Minors Act (UGMA) custodial accounts, and the new Trump Accounts (also called 530A accounts) — each have their own rules, benefits, and tradeoffs. Here's what every family should know before deciding on one or more savings options.

What Makes a 529 Plan Stand Out

The 529 education savings plans were established in 1996 and designed specifically to help families save for future education expenses. Money in a 529 grows federal income tax-free/deferred, and withdrawals are tax-free when used for a wide variety of qualified education expenses, including college tuition, room and board, books, computers, K-12 expenses and tuition (up to $20,000 per year*), student loan repayment (up to $10,000), and more recently apprenticeships, vocational training, and credentialing programs. 

For New Mexico families, the advantage is even greater. Contributions to a 529 savings account with The Education Plan® allows for one of the best state tax benefits in the country. New Mexico residents can deduct contributions from state taxable income, with no cap. Whether you contribute $50 or $5,000, every dollar contributed is eligible for tax deduction.

Another major advantage: the account owner keeps control as long as they like. If your child doesn't use the funds, you have options, including transferring the funds to another family member, or rolling up to $35,000 into the beneficiary's Roth IRA. A 529 plan offers families multiple “exit options” if a student doesn’t go to college or use all the funds in the account.

Coverdell ESAs: More Flexibility, More Limits

A Coverdell Education Savings Account (ESA) is a tax-advantaged account that also offers tax-free growth and tax-free withdrawals for education expenses, including K-12 and college. That sounds a lot like a 529, and in many ways it is. But the differences matter.

The most significant limitation: you can only contribute up to $2,000 per year per beneficiary. Compare that to a 529 plan, where contribution limits are set by each state and are typically much higher, and for New Mexico residents there is no cap. The Coverdell ESA also has income restrictions. Single filers earning more than $110,000 and married filers earning more than $220,000 are phased out entirely. And the account must be fully distributed by the time the beneficiary turns 30, or the remaining balance gets taxed and penalized.

On the positive side, Coverdell ESAs allow a wider range of investment options, including individual stocks and bonds, while most 529 plans offer a diversified menu of mutual funds. For families who want extra investment flexibility and fall within the income limits, a Coverdell ESA can serve as a useful supplement to a 529 plan. Federal law allows you to contribute to both.

UGMA Accounts: Total Flexibility, No Tax Shelter

A UGMA (Uniform Gifts to Minors Act) custodial account isn't an education-specific account at all. It's a general investment account held in a child's name and managed by an adult custodian until the child reaches the legal age of majority (usually 18-21, depending on the state). The child can eventually use the money for anything: college, a car, starting a business, or a weekend trip.

That flexibility sounds appealing, but it comes with real tradeoffs. UGMA accounts offer no special tax benefits. Investment earnings are taxable each year. Under what's called the "kiddie tax" rules, the first $1,350 of a child's investment income is tax-free, the next $1,350 is taxed at the child's rate, and anything above $2,700 is taxed at the parent's rate.

There's also a financial aid consideration: because the UGMA account is technically the child's asset, it's assessed at a higher rate on the Free Application for Federal Student Aid (FAFSA) than a parent-owned 529 plan. Once the child turns 18, the money is theirs, no restrictions, no education requirement, no take-backs. For parents who want to ensure the money goes toward education, a 529 provides much stronger guardrails.

Trump Accounts (530A): The New Kid on the Block

A new option in the savings landscape is the Trump Account (officially called a Section 530A account), which was created by the H.R.1 in 2025. These accounts are structured as custodial traditional IRAs for minors and contributions are now allowed (as of July 4, 2026). If your child was born between January 1, 2025, and December 31, 2028, they may qualify for a one-time $1,000 seed deposit from the U.S. Treasury.

Here's how Trump Accounts work: You can contribute up to $5,000 per year per child (indexed for inflation after 2027), and the money grows tax-deferred until the child turns 18. At that point, the account converts into a traditional IRA and follows standard IRA rules. Importantly, no withdrawals are permitted before the child turns 18.

That last point is a critical distinction. Unlike a 529 plan, which allows tax-free withdrawals for qualified education expenses as early as kindergarten, Trump Accounts don't allow any withdrawals before the child turns 18. After that, withdrawals for higher education are allowed without penalty but are taxable as ordinary income.

For families with children born in the eligible window, signing up for a Trump account to claim the $1,000 federal contribution may be a decision for your family to consider. But financial experts broadly agree that Trump Accounts should complement a 529 plan, not replace it, for families focused on education savings.

Side-by-Side Comparison

Here's how the four account types stack up on the features that matter most to families.
 

Feature	529 Plan	Coverdell ESA	UGMA Account	Trump Account (530A)
Annual or total contribution limit	No annual limit; $500,000 total contribution limit (federal gift tax rules apply)	$2,000/yr	No limit (gift tax rules apply)	$5,000/yr
Tax-free growth	✓ Yes	✓ Yes	X No	Tax-deferred only
Tax-free withdrawals for education	✓ Yes	✓ Yes	X No	X No
NM state tax deduction	✓ Unlimited	X No	X No	X No
Income restrictions	None	Yes, single filers out at $110K; joint filers out at $220K	None	None
K–12 expenses and tuition	✓ Yes (Up to $20,000/year)	✓ Yes	Any use	Not during growth period
Trade school / apprenticeships	✓ Yes	✓ Yes	Any use	After age 18 (taxable)
IRA rollover option	✓ Up to $35,000 into a Roth IRA	X No	X No	Account converts to traditional IRA at 18
Government seed money	None	None	None	$1,000 for births 2025–2028
Child takes control at 18	No, owner keeps control	No; must distribute by age 30	Yes, at 18-21	Yes; converts to traditional IRA

Which Account(s) Are Right for Your Family?

The best answer depends on your goals, but for most families focused on education savings, a 529 plan is the clear winner. Here's a practical way to think about it:

• If your primary goal is saving for education, a 529 plan gives you the most powerful combination of tax-free growth and tax-free withdrawals. It covers the broadest range of qualified expenses, from K-12 expenses and tuition to trade school to college to professional credentialing expenses, and you stay in control of the money.

• If you want extra investment flexibility, a Coverdell ESA can supplement your 529 if you're under the income limits and want access to individual stocks or bonds.

• If you want truly flexible savings (not just education): A UGMA account allows money to be used for anything, but you'll give up the tax benefits and education-specific protections.

• If your child was born in 2025-2028: File IRS Form 4547 to claim the $1,000 Trump Account seed. It's a meaningful starting point, but don’t forget to consider starting a 529 or keep contributing to your account as well.

The good news: you don't have to choose just one. Many families pair a 529 plan with one or more of these other tools to build a well-rounded savings strategy.

Start Small. Start Today.

A little today really can go a long way. With The Education Plan, you can open an account in less than 15 minutes with no minimum to start. Many families choose to use a recurring automatic deposit from their bank account which can easily be set up when opening an account. Learn more about how The Education Plan works and take the first step toward your child's future.

*The limit increased from $10,000/year to $20,000/year in January 2026.