If you’ve got kids (or grandkids) with dreams of college, you’ve probably asked yourself: How am I going to pay for this? Tuition isn’t getting any cheaper, and student loans? Let’s just say they’re not doing anyone any favors.
That’s where education savings plans come in. A 529 plan is the most well-known option, but is it always the best choice? Or are there other savings strategies worth considering? Let’s break it down.
The 529 Plan: College Savings MVP
A 529 plan is like the Swiss Army knife of education savings. It’s designed specifically for school costs, and its biggest selling point? Tax advantages.
Tax-Free Growth: Any money you invest grows tax-free. No capital gains taxes, no surprises.
Tax-Free Withdrawals (If Used for Education): If the funds go toward tuition, books, room and board, or other qualifying expenses, you won’t owe a dime in federal taxes.
State Tax Perks: Depending on where you live, you might get a deduction or credit for your contributions.
529 Plans Aren’t Just for College Anymore
Thanks to recent rule changes, 529s can now cover K-12 tuition (up to $10,000 per year) and even some apprenticeship programs. Plus, if your child doesn’t use all the funds, you can roll up to $35,000 into a Roth IRA for them—no penalty, no wasted savings.
Sounds great, right? So why would anyone look at alternatives?
The Downsides of a 529 Plan
Like any financial tool, 529 plans aren’t perfect.
Limited Spending Flexibility: If your child skips college or doesn’t use the full amount, you’ll owe taxes and a 10 percent penalty on withdrawals for non-education expenses (unless you transfer the funds to another family member).
Investment Choices Are Limited: Most 529 plans offer a preset menu of investment options—not the full freedom of a brokerage account.
Financial Aid Impact: 529 assets count against financial aid eligibility (though at a lower rate than some other savings methods).
If any of these sound like deal-breakers, it might be worth considering some alternative ways to save.
Other College Savings Options—What Else Is Out There?
Custodial Accounts (UTMA/UGMA)
A Uniform Transfers to Minors Account (UTMA) or Uniform Gifts to Minors Account (UGMA) lets you save money for your child, but with fewer restrictions than a 529 plan.
More Flexibility: Money can be used for anything benefiting the child, not just education.
No Contribution Limits: Unlike 529s, there’s no hard cap on how much you can save.
Not Tax-Free: Investment earnings are taxed at the child’s rate (which can still be lower than yours).
Full Control Transfers at Age 18 or 21: Once they hit adulthood, the money is theirs to use as they wish. College? Maybe. A spontaneous trip to Europe? Also an option.
Bottom line: UTMA/UGMA accounts work well if you want flexibility, but if your main goal is college savings, a 529 is usually the better bet.
Roth IRAs for College Savings
Wait—using a retirement account for college savings? It’s an option.
Tax-Free Growth and Withdrawals: Contributions can be withdrawn tax-free anytime, and earnings can be tapped penalty-free for education expenses.
Doesn’t Affect Financial Aid (Much): Retirement accounts don’t count as assets on the FAFSA.
Annual Contribution Limits: You can only contribute up to $7,000 per year (or $8,000 if you're 50 or older), which might not be enough for full college funding.
Retirement vs. College Trade-Off: You’re dipping into your own retirement savings, which isn’t ideal unless you’ve already got that covered.
Best for: Parents who want flexibility and might need the funds for retirement if college plans change.
Taxable Investment Accounts
If you want total control over your money and how it’s spent, a standard brokerage account could be an option.
No Restrictions: Use the funds however you want—education, a house down payment, a business venture, or just letting it grow.
More Investment Choices: Stocks, bonds, ETFs, real estate—you call the shots.
Taxes on Gains: Unlike a 529, investment earnings are subject to capital gains tax.
Financial Aid Considerations: Large account balances can impact aid eligibility.
Best for: High-net-worth families who want ultimate flexibility and don’t mind handling taxes.
So, Which One Should You Pick?
If you’re sure the money will go toward education, a 529 plan is tough to beat—especially with the tax breaks.
If you want flexibility, a custodial account or taxable investment account could be a good alternative.
If you’re already prioritizing retirement savings, a Roth IRA can be a solid backup.
The right choice depends on your financial goals, tax situation, and risk tolerance.
Need Help Crafting a Smart College Savings Plan?
At Halter Ferguson Financial, we help families navigate the best strategies for their education savings—without sacrificing their other financial priorities.
Want a personalized game plan? Let’s talk. Whether you’re just starting or optimizing an existing plan, we’ll make sure your strategy fits your long-term financial picture.
Schedule a consultation today and get your college savings on track.