Saving for college is a major financial goal for many parents: they want their kids to afford a shot at paying for one of the greatest career bumps out there, an undergraduate (or even graduate or professional) degree.
529 plans are a popular choice because contributions grow tax-free when used for qualified education expenses. But they’re not without drawbacks. Limited investment options and restrictions on how you can spend the money can make planning for the future a bit tricky.
Fortunately, if a 529 plan isn’t right for you (or even if it is), there are many ways to squirrel away money for your child’s education. Below are my picks for the best ways to save for college. Consider all the options available and see which savings strategy, or combination of strategies, is the best fit for your family. You might find that a 529 plan is not the best (or only) choice for you.
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Table of Contents
529 Savings Plans
Let’s start with 529 plans, since that’s what most people think of when you mention college savings accounts. I’ll also draw comparisons to 529 plans when discussing certain other options, so it will be helpful to develop a basic understanding of 529 plans before moving on to other college saving methods.
529 Plan Basics
When you open a 529 account for a child or other person (you can open an account for an adult), the account is funded with “after-tax” dollars. Basically, that means there are no federal tax deductions, exclusions, or other tax breaks for contributions to the plan (although state tax breaks might be available), so you put money in the account after paying federal taxes on it.
The money you put in a 529 plan is invested and, hopefully, increases in value (although you can lose money in a 529 plan). The good news is that funds in a 529 account generally grow on a tax-free basis. So, you’re not hit with a tax bill each year for any earnings.
You also don’t pay tax when withdrawing funds from the account, as long as the money is used for qualified educational expenses—including up to $10,000 for tuition at eligible elementary and secondary (K-12) schools or $10,000 in student loan payments. If 529 plan funds are used for other purposes, a penalty applies and related earnings are considered taxable income subject to the same federal tax rates as wages, tips, and other “ordinary” income.
If a 529 account is created for someone who doesn’t attend college or otherwise incur qualified educational expenses, unused 529 plan funds can be rolled over into a family member’s 529 account or ABLE account.
New 529 Rule for 2024 and Onward
A new rule began in 2024. Now, a beneficiary can also roll over up to $35,000 of leftover money in a 529 plan into a Roth IRA in the beneficiary’s name. Any rollover is subject to annual Roth IRA contribution limits, and the 529 account must have been open for at least 15 years.
1. Custodial Accounts (UGMA/UTMA)
With a custodial account, you can put cash or other assets in a special account for a minor. As the account’s custodian, you control it until the child reaches the age of majority—typically 18 to 21 years old, but possibly as late as 25 years of age, depending on the child’s state of residence.
Money can be withdrawn from a custodial account at any time, but it can only be spent in ways that directly benefit the minor.
Once the child reaches the age or majority, they become the owner of the account and can do whatever they want with the funds.
There are two main types of custodial accounts:
— Uniform Gifts to Minors Act (UGMA) accounts
— Uniform Transfers to Minors Act (UTMA) accounts
These custodial accounts generally function in the same way, but they have a couple of minor differences. For example, a UGMA account can only hold traditional financial assets, such as (but not limited to) stocks, bonds, mutual funds, exchange-traded funds (ETFs), and insurance products. UTMA accounts can hold those assets, plus property—say, real estate or cars.
Young and the Invested Tip: Even if a brokerage firm advertises both UGMA and UTMA accounts, you can’t open a new UGMA account today if you live in any of the 50 U.S. states or the District of Columbia. If you try to open a UGMA account, a UTMA account will be opened instead (although you can still own a UGMA account that was opened years ago).
Related: Should You Let Your Kids Move Back Home After College?
Advantages of Saving With a Custodial Account
There are a few significant advantages to using a custodial account to save for a child’s education. For example, as a brokerage account, money in the account can (and should) be invested. Invested capital has the potential to grow in value far more than money in a regular checking or savings account.
There’s also a great deal of flexibility when it comes to spending money in the account. Suppose the child doesn’t need the funds for higher education, but urgently needs money for a different expense. Unlike 529 Plans, there’s no penalty if the money is used for something unrelated to education and there are no early withdrawal fees.
Downside of Saving With a Custodial Account
There is a downside to using custodial accounts to save for college when it comes to a student’s financial aid eligibility. When applying for financial aid, custodial accounts are considered assets of the child, while 529 plans are typically considered assets of the parent. Since students are expected to use a higher percentage of their assets to pay for college (20%) than what their parents are expected to pay (up to 5.64%), the student’s expected family contribution (EFC) will be higher with a custodial account than with a 529 plan. A higher EFC typically means less in financial aid.
Related: 6 Times When You Should Hire a Financial Advisor
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2. Coverdell Education Savings Accounts (ESAs)
A Coverdell Education Savings Account (ESA) is a type of investment account that makes it easier to pay education expenses for your children or loved ones.
Coverdell ESAs are similar to 529 plans. For instance, as with a 529 plan, contributions to a Coverdell ESA are made on an “after-tax” basis, money in a Coverdell ESA grows tax-free at the federal level if used for qualifying education expenses, and taxes must be paid on related earnings (along with a penalty) if funds in a Coverdell ESA are used for nonqualified expenses.
However, there are also some important differences between Coverdell ESAs and 529 plans. For example, unlike 529 plans, the following rules apply to Coverdell ESAs:
— Contributions to an account must be made before the beneficiary is 18 years old (except in the case of a special needs beneficiary).
— Annual contributions per beneficiary are limited to $2,000.
— The $2,000 annual contribution limit is gradually reduced to $0 if the contributor’s modified adjusted gross income (AGI) is between $95,000 and $110,000 ($190,000 to $220,000 for married couples filing a joint tax return).
— Funds in the account must be distributed by the time the beneficiary reaches age 30 (except in the case of a special needs beneficiary).
— There’s no limit on distributions used for K-12 school expenses.
Because of the additional restrictions on contributions, Coverdell ESAs aren’t as popular as 529 plans. However, if you’re saving for K-12 education costs, a Coverdell ESA might be a better option since there’s no limit on distributions for these expenses. Money from a Coverdell ESA can also be used for more than just K-12 tuition.
Coverdell ESAs typically offer more investment options and control, too. This might be an important consideration for some families.
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3. Prepaid Tuition Plans
Prepaid tuition plans (also called guaranteed savings plans) are actually a type of 529 plan. However, we’re treating them as an alternative to traditional 529 plans since they work differently.
While not available in every state, prepaid tuition plans allow you to lock in current tuition rates for college expenses incurred years from now. You can often purchase anywhere from one semester to four years of college in advance with a prepaid tuition plan. When the beneficiary is ready to attend college, the plan will cover eligible expenses while the beneficiary is in school and pay the educational institution.
So, unlike standard 529 plans, a prepaid tuition plan protects you from rapidly rising tuition rates in the future. That’s the main benefit of these plans. But they’re also a lower-risk option, since you’re not subject to the same kind of investment loss associated with standard 529 plans.
On the other hand, a prepaid tuition plan only covers tuition and fees. It generally can’t be used to pay for other higher-education expenses, such as room and board.
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Are There Tax Benefits to Saving With a Prepaid Tuition Plan?
As with standard 529 plans, there’s no tax deduction for contributions to a prepaid tuition plan (i.e., money is put into the account on an “after-tax” basis). But there’s also no tax on earnings or distributions for qualified educational expenses.
Prepaid tuition plans are typically state-run plans set up to pay tuition at in-state colleges and universities. However, if the beneficiary ends up attending an out-of-state or private school, you can usually transfer the value of a prepaid tuition plan to the other school.
There’s also a prepaid tuition plan offered by a group of nearly 300 private school members from across the country. It’s called the Private College 529 Plan, and might be a good option for kids who have their heart set on attending one of the participating private colleges or universities.
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4. Roth IRAs
Roth IRAs are best known for retirement savings, but they’re also an excellent option for funding your child’s college expenses. The tax advantages are similar to those for 529 plans. However, you’ll have more investment options with a Roth IRA than with a typical 529 plan. Another bonus is that any money not used toward education can stay in the account as retirement funds.
From a tax perspective, contributions to a Roth IRA are made on an “after-tax” basis, so you don’t get a tax break when you put money into the account. However, contributions and earnings grow tax-free.
You also never have to pay taxes when you withdraw contributions. Withdrawals of earnings are subject to income tax if you tax money out of the account before you turn 59½ years old.
In addition, withdrawing earnings before age 59½ generally results in a 10% penalty. However, the penalty doesn’t apply if the money is used for qualified higher-education expenses for either:
— Yourself
— Your spouse
— Your or your spouse’s child, foster child, or adopted child
— Your or your spouse’s grandchild
Keep in mind that you can only contribute to a Roth IRA if you have earned income. As a result, if a Roth IRA is opened in a child’s name, the child needs to have some type of work that makes them money.
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Roth IRA Contribution Limits To Know
There are also annual contribution limits for Roth IRAs that might make it difficult to save enough for a pricey college education. The 2026 contribution maximum is $7,500 for everyone under age 50, but it rises to $8,800 if you’re 50 or older (these limits apply to the total amount contributed to all IRAs you own). However, the maximum amount is gradually reduced to zero if your 2026 modified AGI is:
— $153,000 to $168,000 if you use the single or head of household filing status on your tax return
— $242,000 to $252,000 if you’re married and file a joint return
— $0 to $10,000 if you’re married but file a separate return
Roth IRA funds aren’t included in financial aid calculations, but withdrawals count and can affect the amount of aid awarded.
Young and the Invested Tip: You have until the tax filing deadline for the year to make contributions to a Roth IRA. So, for example, you have until April 15, 2026 to put money in an IRA for the 2025 tax year.
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5. High-Yield Savings Accounts
If you’re looking for the ultimate in flexibility and low risk, there’s always a traditional savings account with a bank.
You can put in as much as you want (although be mindful of FDIC insurance limitations), withdraw funds almost any time you want, and use the money for whatever you wish.
It’s also a safe bet. Unlike 529 plans and other investment accounts, there’s generally no chance of losing money in a savings account if you fall within the FDIC’s $250,000 of insurance coverage per depositor.
But, of course, the downside is that your return on investment is going to be low with a savings account. And with the sky-high cost of higher education these days, most people probably won’t see the type of growth they need to save up enough money for college.
You’ll also miss out on the tax savings available with 529 plans and some of the other methods for saving for college.
Nevertheless, if you do decide to put money in a savings account to beef up funds for higher education, at least consider a high-yield savings account. With a high-yield account, you’ll accumulate more money for college than with a standard savings account.
High-yield savings accounts often pay upwards of 15 to 25 times the national average of a standard savings account. They are also typically offered by online-only banks because of their lower cost structure than brick-and-mortar banks.
The interest rates for high-yield savings accounts are variable, so the rate you sign up for might change. However, even if your rate goes down, it will likely still be significantly higher than the rate of a standard savings account.
Consider placing your money in one of the most competitive high-yield savings accounts available on the market through CIT Bank. It offers an easy application process (about five minutes), extremely competitive rates, no service fees, and mobile banking functionality.
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6. Savings Bonds
Savings bonds are loans to the U.S. government. When you purchase a U.S. savings bond, you get your principal back, plus interest, when you cash in the bond or it reaches full maturity. You can cash in a bond after one year, but you’ll lose three months of interest if you cash it in before five years.
For Series EE and I bonds, the interest is only taxed at the federal level. They’re not subject to state or local income tax in most situations. You can also choose to pay federal tax on the interest earned each year or wait to pay tax on all the interest when you cash in the bond.
But here’s what makes savings bonds a good choice if you’re saving for college: If the money is used for qualifying education expenses, you won’t have to pay any tax on the interest if all of the following requirements are satisfied:
– -You were at least 24 years old when the bonds were issued.
— Your modified adjusted gross income is less than the cut-off amount for the year in which you claim the exclusion, which is $182,650 for joint filers and $116,800 for everyone else for 2026.
– -You cash in the savings bonds in the same tax year for which you claim the exclusion.
— You paid qualified higher education expenses to an eligible institution that same year.
– -The expenses were for yourself, your spouse, or someone you list as a dependent on your federal income tax return.
— You don’t use the married filing separately filing status on your federal tax return.
Savings bonds are considered one of the safer investment options, meaning you can rest assured that the child will get the amount of money they’re promised.
U.S. savings bonds are also easy to purchase online at TreasuryDirect. Once they’re bought and gifted, all you have to do is wait until they mature for the child to cash in and use the funds. You don’t need to actively buy and sell any financial assets frequently.
Related: What Is a Savings Burn Rate?
7. Trusts
Setting up a trust fund to pay for higher-education expenses can offer more flexibility than a 529 plan. However, trusts set up for educational expenses are often irrevocable, so you might not be able to designate funds for college and then change your mind later.
With regard to greater flexibility, trusts offer more investment options than 529 plans, which are usually more limited in their investment options. With a 529 plan, only cash contributions are allowed, but you can put stocks, bonds, and other investment assets in a trust.
You’ll also have more choices with a trust than with a 529 plan when it comes to when and how money and assets in the trust are used. For instance, you can set up a trust so that some funds are to be used on tuition and fees, while other funds are used for other expenses, such as housing or medical expenses.
On the other hand, a trust might make it harder for the beneficiary to qualify for financial aid. Trust funds are generally treated as the beneficiary’s asset. As noted earlier, the beneficiary (student) is expected to use a higher percentage of their assets to pay for college than what their parents are expected to pay, which means the beneficiary’s expected family contribution will be higher with a trust than with a 529 plan.
Trusts also aren’t a quick and easy way to save for college, and there are additional costs associated with them. For instance, you’ll need to hire an attorney to set up the trust, and you might also want to consult with a financial advisor as well.
Related: How to Choose a Financial Advisor
Options For Unused 529 Plan Funds: 1. Roll Them Into a Roth IRA
There’s a new rule in place that makes 529 plans an even more attractive way to save for your child’s education. Starting this year, unused funds in a 529 plan can be transferred into a Roth IRA.
As a result, parents don’t have to worry as much about having leftover funds in a 529 plan if their child doesn’t attend or finish college, earns a scholarship, picks a less expensive school than expected, or otherwise doesn’t need all the money saved over the year in a 529 plan.
However, there are a number of requirements, restrictions, and limitations to the new 529-to-Roth IRA transfer rules. And if you mess up and don’t follow the rules, you could end up with a big tax bill and be hit with a hefty IRS penalty.
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2. Transfer Unused 529 Funds to a Family Member’s 529 Plan
Leftover 529 plan funds can be transferred to a family member’s 529 account without triggering any taxes or penalties. You can also simply change the beneficiary to a member of the original beneficiary’s family.
However, taxes and penalties will still be due if the money eventually is used for something other than qualifying educational expenses.
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3. Transfer Unused 529 Funds to a Family Member’s ABLE Account
Excess funds in a 529 plan can also be moved to a family member’s ABLE account, which is a savings account for people with disabilities.
However, if you’re transferring money from a 529 plan to an ABLE account, make sure you don’t exceed the ABLE account’s annual contribution limit.
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4. Pay Student Loan Debt With Unused 529 Funds
As noted earlier, money in a 529 plan can be used to pay up to $10,000 of a beneficiary’s student loan debt. It can also be used to pay up to $10,000 of student loan debt owed by the beneficiary’s sibling.
The $10,000 cap is a lifetime limit, not an annual one. It’s also a per beneficiary limit, not a per account limit. Payment of a sibling’s student loan counts against the sibling’s lifetime limit, not the beneficiary’s limit.
Young and the Invested Tip: The student loan interest deduction is reduced by the amount of student loan interest paid with tax-free earnings withdrawn from a 529 account. However, the deduction isn’t impacted by interest paid with 529 account contributions.
Related: Are you Saving Enough for Retirement?
5. Leave Unused 529 Funds In Your Account
Since there’s no time limit on using money in a 529 plan, you can always leave excess funds in a 529 plan account to use in the future. The beneficiary might eventually decide to take additional courses, attend graduate school, or even pass the leftover funds on to children of their own.
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It’s difficult to resist the charm of high-yield dividend stocks. Their ability to generate outsized amounts of cash makes them the stuff of dreams for those living on a fixed income—as well as for any investors who simply want a little performance ballast during periods of rough stock-price returns.
But we prefer quantity and quality. For instance, our favorite high-yield dividend stocks deliver much sweeter yields than the average stock, show more signs of fundamental quality than most, and have the confidence of Wall Street’s analyst community.
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