5 Types of College Savings Accounts You’ll Love

In This Article

1. Types of College Savings Accounts

2. 529 Plans vs. Educational Savings Accounts

3. How To Choose a College Savings Account

Georgetown University found that around 65% of all jobs require education beyond high school. This means helping to pay for your child’s college education will set them up to be competitive in the future job market.

The benefits of having a college degree go far beyond the workforce as well. According to a CollegeBoard report, a college education leads to a healthier lifestyle. College graduates exercise more throughout their lifetime and even live longer than non-college graduates.

Of course, knowing the importance of saving for your child’s education is only one piece of the puzzle. How to save for it is another.

With several options for a college savings plan available, you’ll need to choose which one is the right fit for you and your child.

Types of College Savings Accounts

529 Plans

Each state in the U.S. offers at least one type of 529 college savings plan. These plans are available to anyone, and a state financial advisor manages them. While each state’s 529 plan can vary, many similarities exist.

These are post-tax plans, meaning ‌you pay taxes on the money before putting it into the 529 savings plan. This way, you won’t pay taxes when withdrawing funds for college expenses in the future.

529 plans are the most used college savings accounts because they don’t have gross income limits, and anyone—parents, grandparents, friends—can put up to $17,000 per donor per year into the account.

Plus, you don’t have to worry about state or federal government penalties, as long as you use the funds for qualified education expenses—tuition, fees, room and board, computer, etc.—at a FAFSA-participating school.

Education Savings Accounts (ESA)

Education Savings Accounts (ESA)—also called Coverdell Education Savings Accounts—are post-tax plans as well. This means your child will not have to pay federal income taxes upon distribution.

Coverdell ESA plans come in a range of investment options, from high risk to very low risk. You get a higher interest rate of return on the money put into an ESA than that of a 529.

Another benefit of a Coverdell ESA is that you can use the funds for any educational institution, including private colleges and even K-12 tuition costs.

To qualify for an ESA plan, couples must make less than $220,000 per year or $110,000 as an individual. The contribution limit to the Coverdell account is a maximum of $2,000 per year until the child’s 18th birthday.

When the child reaches the age of 30, you must liquidate the account or move funds over to another family member to avoid penalty.

Custodial Accounts

Parents use custodial accounts due to the tax advantage. With a custodial account, the money put into the account is taxed at the account owner’s rate. Since children typically make less money than their parents, the federal and state tax rate is much smaller.

Individuals can contribute up to $15,000 per year to a custodial account or $30,000 per couple without needing to pay a gift tax. The child does have to pay the taxes on any returns the account earns.

When the child turns 18 or 21—depending on the rules in your state—they can withdraw the money for any expenses they choose. You don’t need to use the funds in a custodial account for educational expenses.

Prepaid Tuition Plans

With the rising costs of college tuition, a prepaid tuition plan may be the perfect place to put your child’s college funds. These plans are ‌how they sound: you pay for your child’s future tuition now at today’s rates.

A wide range of prepaid tuition plans are out there, but most require your child to attend college within their home state. These plans only cover the future tuition for your child and not other educational expenses, such as room and board.

The downside of these plans is ‌they do not give you any rate of return. Making it a gamble whether tuition will rise higher over the course of your child’s life than average market gains.

Roth IRAs

Many people think of a Roth IRA as a retirement account. It’s true that these investment accounts open up tax-free funds to the account holder at the age of 59 ½, but they also provide other benefits.

Similar to 529 plans, Roth IRAs are post-tax plans, and you can use them to cover college expenses. With a fixed rate of return, these plans offer security to risk-averse parents.

While the principal—money you put in—can be withdrawn at any time without penalty, the earnings get taxed. Using the earnings of a Roth IRA for educational expenses means your child will not have to pay federal withdrawal penalties of 10% to the IRS.

But what if your child chooses not to go to college? The best part about a Roth IRA as a college savings account is the money is still available to them or for your own retirement.

529 Plans vs. Educational Savings Accounts

Comparing the pros and cons of 529 plans and educational savings accounts can be a great way to decide which account is right for you.

529 Plans

Educational Savings Account

How To Choose a College Savings Account

You have many factors to consider when choosing which college savings account is right for you and your child.

While it’s wise to start saving early, remember that several factors will be unknown for quite some time.

College Choice

No one knows if your child will wish to go to school. With so many options available to them, make sure ‌your college savings account provides your child with choices.

Perhaps they’ll want to enter a technical school or need some time off before jumping into college after high school. The key is to put yourself in a position to be flexible with their college savings.

Financial Aid Opportunities

Most parents do not end up saving enough money to completely cover all of their child’s higher education expenses. Once your child is old enough, they will fill out a FAFSA (Free Application for Federal Student Aid) to determine their financial aid eligibility.

By saving for your child’s college now and using several financial aid options—such as grants, scholarships, and student loans—you’ll model smart financial planning while reducing their future college debt.

Scholarships

Many scholarships are out there to help cover the costs of a college education. By applying for scholarships and writing quality scholarship essays, your child can earn thousands of dollars to help pay for college.

Earning scholarships is not as far-fetched as some may think. On average, over 75% of students pay for part of their college with scholarship funds.

With the increase in students taking college courses online, there are even quite a few college scholarships available to online learners.

Future of Education

The future of higher education is ‌unpredictable. You may need to spend your saved funds on an alternative to a traditional 4-year university.

One money-saving option is taking foundational courses for transferable credit.

Golden Gate University’s Degrees+ powered by Outlier.org is a competitive online program. Students getting their associate degree through the program pay just $149 per transferable college credit. That’s less than ⅓ the average US college tuition. Degrees+ offers high-quality courses with lecturers from top universities, including several Ivy League schools.

Considering all the plans and options for saving money for college, it’s time to plan.

Take another look at the types of college savings accounts listed. Make a list of what you’re looking for and find the best match for you and your family.

But remember. ‌Any amount of money saved for your child’s education will be a tremendous gift to them and their future.

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