Paying for college is one of the biggest financial goals many families hold. With rising tuition costs and additional expenses like housing, books, and fees, planning ahead can make a significant difference. Fortunately, there are a variety of savings tools available to help parents, grandparents, and even students set money aside efficiently. Below, we break down the top college savings programs, additional options to consider, and practical tips to financially prepare for your child’s education.
Top Programs
529 College Savings Plans
One of the most popular ways to save for college is through a 529 Plan, a tax-advantaged savings plan designed specifically for education.
- Tax benefits: Earnings grow tax-deferred. As long as you use it for a qualified educational expense, withdrawals are tax-free.
- Qualified expenses: For K–12, funds are primarily for tuition. For college, funds can be used for tuition, fees, room and board, and books. (They cannot be used for travel to college, extracurricular activities, testing, or college application fees.)
- Contribution limits: Vary by state. Some state tax deductions may be permitted!
- Age restrictions: None.
- Investment options: Could be more limited – typically just mutual funds.
- What happens to a 529 plan if the child doesn’t go to college?
- Money in a 529 can be moved to another beneficiary. Individuals can also roll over up to $35,000 into a Roth IRA for the beneficiary, although annual contribution limits and stipulations apply (such as the 529 had to be in place for 15 years from the first contribution).
Coverdell Education Savings Accounts (ESA)
Coverdell ESAs offer similar tax advantages to 529 plans but with different rules.
- Tax benefits: Earnings grow tax-deferred, and withdrawals for qualified education expenses are tax-free.
- Age restrictions: Accounts must be set up by age 18 and used by age 30.
- Contribution limits: $2,000 per year per beneficiary.
- Flexibility: ESA funds can be used for K-12 as well as college. For K-12, this can be used for tutoring, books, and supplies.
- No state deductions: Contributions are not eligible for state tax deductions.
- Best for: Families with younger children who want more flexibility for K–12 educational costs.
Custodial Accounts (UGMA/UTMA)
A UGMA is a Uniform Gifts to Minors Act, and a UTMA is a Uniform Transfers to Minors Act. Custodial accounts can be a flexible method to consider when you’re not certain your child will pursue college.
- Taxes: No special tax advantages for education expenses, but investment income may be taxed at the child’s rate.
- Ownership: Assets are owned by the minor and managed by an adult custodian until the minor reaches adulthood.
- Contribution limits: Anyone can contribute; there are no contribution limits.
- Best for: Flexibility in how funds can be used, not just for education.
Roth IRAs for Education
Though historically primarily retirement accounts, Roth IRAs are gaining popularity for education savings due to their flexibility.
- Taxes: Contributions are made with after-tax dollars. Earnings grow tax-free, and withdrawals are also tax-free if certain conditions are met.
- Contribution limits: $7,000 per year for 2024, catch-up contributions for those 50+.
- Best for: Dual purpose – retirement savings and education funding.
High-Yield Savings Accounts
For families looking for low-risk savings, high-yield savings accounts can be a simple option.
- Benefits: Offer higher annual percentage yields than traditional savings accounts.
- Considerations: Interest rates may fluctuate, and inflation can impact real returns.
Which Option Might Be Right for You?
- 529*: Best for high contribution limits and education-specific tax benefits.
- Coverdell ESA: Useful for broader education expenses but with lower contribution limits.
- Custodial accounts: Offer flexibility but without specific education tax benefits.
- Roth IRA: Offers tax-free growth and flexibility but with lower contribution limits.
Many families choose to combine multiple strategies - for example, opening a 529 savings plan, investing in a brokerage account, and setting aside funds in a Roth IRA - to maximize flexibility and potential tax benefits.
Other Savings Options to Consider
Beyond the core savings vehicles, families may also explore:
- Cash value life insurance
- Bonds
- Annuities
- Brokerage accounts
- Regular savings accounts
- Prepaid tuition plans
How to Financially Prepare for College
- Start saving as early as possible
- Understand and learn how the Financial Aid system works (FAFSA)
- Assets counted in FAFSA:
- 529 Plans and Coverdell ESAs
- UGMA/UTMA custodial accounts
- Brokerage accounts (stocks, bonds, mutual funds)
- Savings and bank accounts
- Equity in investment real estate
- Commodities
- Cash gifts to students (if counted as income)
- Assets not counted in FAFSA:
- 401(k), Roth IRAs, Traditional IRAs (note: Roth withdrawals are counted as untaxed income)
- Cash values of life insurance
- Cash values of qualified annuities
- SIMPLE, Keogh, and pension plans
- Certain annuities
- Assets counted in FAFSA:
- Apply for private scholarships: Encourage students to work with school counselors and research scholarship opportunities early.
- Determine the actual cost of college.
- Encourage students to consider summer job/student work programs.
There are several ways to save for college for your children, and you may not have to choose just one! Planning early and using multiple tools can help make higher education more affordable and less stressful. Weigh the pros and cons, understand the differences, and you’re bound to find a balanced savings and investment strategy for your goals!
Every family’s situation is unique. If you’d like personalized guidance on which options make the most sense for you, schedule a complimentary introduction with one of our advisors! Together, we can help you clarify your goals and create a customized strategy.
*A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional. Non-qualifying distribution earnings prior to 2024 are taxable and subject to a 10% tax penalty. Beginning in 2024, unused 529 plan funds may be rolled into a Roth IRA assuming the following conditions are met: 1) must have owned the 529 plan for 15 years, 2) can only convert funds that have been in the 529 plan for at least 5 years, 3) rollover amount cannot exceed $35,000 and 4) rollovers must be made to a beneficiaries Roth IRA. Fixed Annuities are long term insurance contracts and there is a surrender charge imposed generally during the first 5 to 7 years that you own the annuity contract. Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.