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College Savings Accounts

When it comes to paying for college, not every student will land a full-tuition scholarship, and federal student financial aid seldom takes care of all college costs. If you're a parent or relative looking ahead to cover costs and reduce loans, finding scholarships is a great step, but also consider planning ahead and research college savings plans.

529 Plans

529 Plans are state-operated accounts that offer tax advantages when used for qualified educational expenditures. Each state offers at least one 529 plan. The two types of 529 plans are prepaid tuition plans and college savings plans. Prepaid tuition plans allow parents to purchase tuition credits that will cover the cost of future college expenses at their current rate - typically at in-state, public universities. College savings plans, although more flexible, do not offer a guarantee but come with a variety of investment options and opportunity for higher returns.

Roth IRA

Roth IRA's are special retirement accounts where you pay taxes on money going into your account and then all future withdrawals are tax-free. Roth IRAs can be used to save money for school. As long as you're withdrawing contributions, rather than earnings, there is no penalty if you are using the money from your IRA for educational expenses. However, a college savings plan may be a better option if you're setting up an account specifically for your student since contributions to a Roth IRA must come from the beneficiary's earned income. Dipping into your retirement funds to pay for college is widely regarded as a less than ideal choice by financial experts.

UTMA

The Uniform Transfer to Minors Act allows a minor to receive gifts without the help of a guardian or trustee and without the establishment of a trust. While the aforementioned options have been either savings accounts or investments, UTMA covers everything, including property. An adult manages these assets in a custodial account until the owner reaches the age of 18 or 21, depending on the state. In the meantime, the funds in the account can be used to benefit the child, including taking care of educational expenses. Once the owner reaches the age of majority, the assets are theirs to use as they please. This can mean paying for school, or it can mean making less desirable financial choices. Since these assets belong to the student, they would count against them for student financial aid.

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Last Reviewed: September 2020