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College saving 101

A college education is a way to open up more options for kids (and adults!). If you want to help someone in your life attend college, consider the features of these savings tools.

Savings Options

  • 529 plans. A 529 plan is an investment account—operated by a state or educational institution—designed to help people save for college. Many states offer tax benefits to state residents for money deposited in their 529 plans. Also, all withdrawals—including potential earnings—are free of federal taxes as long as they’re used for qualified higher education expenses.
  • Coverdell Education Savings Accounts (ESAs). Coverdell ESAs are tax-advantaged accounts that allow you to set aside up to $2,000 for qualified college costs. There are no tax advantages on contributions; however, beneficiaries can withdraw money—including potential earnings—free of federal taxes as long as the funds are used for qualified higher education expenses.
  • Uniform Trust/Gift to Minors Act Account (UTMA/UGMA). This custodial account is managed for the benefit of a minor. Keep in mind that you can’t control how this money is used once the child reaches the age at which he or she gains ownership of the account.
  • Education Bond Program (U.S. Savings Bonds). Series EE (issued after 1989) and Series I Savings Bonds may be used to fund qualified education expenses. These bonds also offer tax advantages for qualified education expenses for yourself or a dependent you claim on your taxes; however, those advantages phase out over certain income limits.
  • Roth IRA. This tax-advantaged retirement vehicle may also be used to fund qualified higher education expenses. Early withdrawal penalties are waived when Roth IRAs are used to pay qualified post-secondary education costs. (Taxes may still be due on the withdrawals of any potential earnings, however.) An added benefit of a Roth IRA is that it can be used for retirement if the funds aren’t needed for college costs.

Need help deciding which college savings vehicle is right for you?

Whichever savings vehicle you choose, start soon. The sooner you start saving for college, the more time the money has to potentially grow.

» Let us connect you with a financial professional who can help.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.


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