Some Alternatives to “529” Education Savings Plans

Many financial advisors recommend “529” education savings plans to their clients in order to help for the future cost of higher education. Among the advantages of “529” education savings plans are tax-deterred growth and tax-free withdrawals to pay qualified expenses such as tuition, fees, books and equipment. In addition, according to the web site www.savingforcollege.com, the lifetime contribution limits (which vary by state) to “529” education savings plans are generous, ranging from $235,000 to more than $550,000. In recent years education savings plans have gotten more attractive because tax-free withdrawn funds can be used to pay tuition for kindergarten through 12^th grade. Another change that came out of SECURE Act 2.0 allows leftover funds in a “529” education savings plan to be directly rolled over tax-free to a Roth IRA.

In spite of their advantages, there are individuals who are not attracted to 529 education savings plans. Tamong the individuals who are not attracted to education savings plans are parents who are not sure of their children’s higher-education plans and parents who are hesitant to tie up money they may need for other purposes.

This column presents four alternatives  to “529” education savings plans for parents saving for their children’s future higher education.

Taxable Brokerage Accounts

Financial advisors say taxable brokerage accounts are a good option for saving for college. Among the advantages is the fact that there are no contribution limits to a taxable brokerage account. Another advantage is that the accumulated funds in the account do not have to be spent on college education expenses. This is especially important for parents whose children decide not to attend a college or university.

However, there are disadvantages to saving for college education expenses using a taxable brokerage account. One disadvantage is that withdrawals from the account are taxable, both federal and state. Another major disadvantage is that a taxable brokerage account is counted as an asset of the parent for the purpose of their child qualifying for federal financial aid. The impact on aid will be larger if the brokerage account is owned by the child (the student).

Roth IRAs

Roth IRAs allow contributions funds to grow and to compound tax-free if funds are not withdrawn before the Roth IRA owner becomes age 59.5. Roth IRAs are typically used as a source of tax-free income during retirement. If funds are withdrawn after the Roth IRA becomes age 59.5, they are income-tax free and are not subject to required minimum distributions that traditional IRAs are subject to.

Roth IRA contributions can be penalty-free and tax-free withdrawals at any age for any reason, including paying education expenses. Earnings can also be withdrawn, penalty- and tax-free, only if the Roth IRA account has been open for at least five years and the withdrawal is for a qualified education expense.

A disadvantage to using Roth RIAs as a way for paying education expenses is that annual contributions to Roth IRAs are capped. For example, during 2025 the annual contribution limit to a Roth IRA is $7,000 if the Roth IRA owner is younger than 50, and $8,000 if the Roth IRA owner is over 49 as of December 31, 2025.

Another disadvantage for using Roth IRAs to pay for education expenses is annual adjusted gross income limitations for contributions. For 2025, single and head of household tax filers are restricted for contributing to Roth IRAs once their adjusted gross income (AGI) is $150,000 and if their AGI exceeds $165,000 during 2025 they cannot contribute to a Roth IRA. Couples who are married and filing jointly begin “phasing out” their Roth IRA contributions starting at $236,000 of AGI. Married filing joint filers cannot contribute to Roth IRAs during 2025 once their AGI is $240,000.

UGMA or UTMA Accounts

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are types of custodial bank or brokerage accounts established for a minor beneficiary. A. An UGMA/UTMA account is designed to hold and protect assets for the beneficiary. The donor to the UGMA/UTMA (usually a parent) can appoint themself or a financial institution as the account custodian. The custodian has the authority to buy stocks, bonds, open-ended funds, closed-ended fuds and other securities on behalf of the minor.

UGMA/UTMA assets are typically used to fund a child’s education, but the donor can make withdrawals for just about any expense that benefits the beneficiary. There are no withdrawal penalties. The law allows a limited amount of earnings to be taxed at the child’s tax rate.

A significant disadvantage of UGMA/UTMA accounts is that they have one of the highest impacts on financial aid because funds count as student assets for federal financial aid purposes.

Another disadvantage is that the child gains control of the assets at the age of majority (which could be age 18 or age 21, depending on the state). Some parents may not want that, especially if the account has amassed sizable savings.