While 529s are the most well-known option, there are other ways to save even more for higher education expenses.
On average, Americans have saved more than $26,0001 in 529 accounts—no small number, and no small feat. But is it enough? Probably not: The average cost for attending a public institution of higher education is more than $26,000—for just a single year.2
Does that mean you shouldn’t try to save anything because you might not be able to save everything? Absolutely not. In fact, the same guidance for retirement savings—“Put away as much as you can for as long as you can”—may serve you well to save for college. And there are more tools to put to work than just a 529. Here are six to consider.
1. 529 college savings plan
Well-known education savings investment account operated by a state or educational institution and controlled by you. Covers tuition, fees, books, computers and related equipment, supplies, special needs, some room and board at eligible colleges and universities, and up to $10,000 in tuition expenses at private, public, and religious K-12 schools.
Impact on your money: There are no contribution limits, and tax benefits in some states. No federal tax, including on potential earnings, if used for qualified education expenses. Tax implications if you’re not the parent of the beneficiary, or for money contributed above annual gift exclusion amounts. (Check with your tax advisor.)
2. Roth IRAs
Roth individual retirement accounts can be used to fund qualified education expenses such as tuition, fees, books, computers and related equipment, supplies, special needs, some room and board at eligible colleges and universities, and up to $10,000 in tuition expenses at private, public, and religious K-12 schools.
Impact on your money: Early withdrawal penalties are waived when used and withdrawn correctly for qualified expenses (but taxes may still be due on potential earnings withdrawals if the account is less than five years old and you are younger than 59½). Doesn’t count as parental assets under federal formula for student financial aid but withdrawals of principal and interest are counted as income on financial aid application.
3. Coverdell Education Savings Accounts (ESAs)
Account for qualified education expenses (tuition, fees, books, supplies, equipment, and special needs, room and board for students going to school at least half-time, some K-12 expenses) for a beneficiary. Maximum contribution of $2,000 with an income phase out.
Impact on your money: There are no tax advantages for ESA contributions, but no federal taxes on withdrawals or potential earnings if used for qualified education expenses. If account money is owned by parents, a percent of the assets are counted against federal financial aid. (Check with your tax advisor.)
4. Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA)
Used to transfer any asset (UTMA) or set up an account using cash, securities, and/or insurance policies at a bank or brokerage (UGMA) without establishing a special trust, with no use restrictions—i.e., doesn’t have to be used for education expenses. Controlled by whoever opens an account (doesn’t have to be a parent) until the child gains ownership (generally 18 to 21 years old, depending on the state).
Impact on your money: There may be gift tax implications and these are considered student assets on the FAFSA®.
5. U.S. Savings Bonds
Series EE (issued after 1989) and Series I bonds can be used to pay for qualified education expenses (tuition and fees) for you, a spouse, or a dependent. Specific rules regarding annual purchase limits, who purchases the bond, how funds are used, and how they’re reported to the IRS.
Impact on your money: Interest earned may be exempt from federal taxes and is usually exempt from state and local taxes, but tax advantages phase out over certain income limits.
6. Life insurance
Policy for a child or parents that has a cash value which you may be able to use to help cover college costs.
Impact on your money: Premium payments are made with after-tax money so growth is not taxed. The policy’s value isn’t counted as an asset when applying for federal financial aid. Loans you take against an active policy’s cash value are income tax-free. Some limits to the amount of premium policy payments you can make to maintain the income tax-free status of withdrawals.