Ways you can save even more for your kid’s college education

On average, Americans have saved more than $30,295 in one of the more popular savings accounts for college, a 529 plan. It’s no small number, and no small feat. But is it enough? Probably not: The average cost for attending a public four-year, in-state institution of higher education is more than $27,000—for just a single year.

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 five (including the 529) to consider.

These well-known education savings investment accounts are operated by a state or educational institution but controlled by you. The funds can be used to cover tuition, fees, books, computers and related equipment, supplies, special needs, and 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. A few key things to know about 529s: 

• They have no contribution limits. 
• There may be a state tax benefit. Search “529 tax benefit in [state name]” or view this list of 529 tax deductions by state. 
• There’s no federal income tax on 529s, including potential earnings, if used for qualified education expenses. 
• There are tax implications if you’re not the parent of the beneficiary, or if the funds contributed are above annual gift exclusion amounts. 

What if you save a lot in a 529, but end up with unused funds? Now, there’s a new way you can put them to use: You may roll over $35,000 from a 529 into a Roth IRA that’s opened by the 529 beneficiary. That contribution is a lifetime limit, and the 529 must have been opened for 15 years, with the rollover funds in the account for at least five years. 

Your financial professional or tax advisor can help you strategize.

A Coverdell Education Savings Account is another type of account for qualified education expenses, including tuition, fees, books, supplies, equipment, and special needs, and room and board, for students going to school at least half-time. Some K-12 expenses may also be paid using an ESA. 

You can contribute up to $2,000 annually to your ESA, depending on your income. (The more you make, the less you’re able to save in an ESA.) When the money is used for qualified education costs, you don’t pay federal taxes on the withdrawals or any earnings. 

That said, contributions don’t come with a tax break. And if a parent owns the account, part of the balance may count when schools calculate federal financial aid. A tax advisor can help you determine if an ESA is right for you.

Two pieces of legislation enable asset transfers from parents to children, who can in turn use them to pay for educational or other living expenses. The first, the Uniform Transfers to Minors Act, enables a parent to transfer assets including cash, investments, and insurance policies to an account that’s managed by a custodian until a child reaches the age of maturity, which varies by state. Or, using the Uniform Gifts to Minors Act, a parent can gift some types of assets to an account at a bank or brokerage in a child’s name; in this instance, the parent controls the account until the child reaches the age of adulthood in their state. There aren’t any tax benefits, and there may be financial aid implications for a student, too.

There are two ways that Roth individual retirement accounts can be used to fund qualified education expenses. The first is with a parent-owned Roth IRA: You can withdraw educational expenses at any time with no penalties. (If you make withdrawals before you reach age 59½ and if the account is less than five years old you will face a penalty.) 

The second way to use a Roth IRA for education is through a custodial Roth IRA. This Roth IRA is set up for a child who has earned income , like a job or self-employment in which they’ll receive a W-2 or other documentation. Contributions from that account may also be withdrawn to pay for educational expenses. (Contribution limits are set by the IRS and subject to change.) 

Neither a parent’s nor a custodial Roth IRA is included on federal financial aid applications. However, withdrawals you use for education expenses will show up on those applications two years later, which may affect expected aid.

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. There are specific rules regarding annual purchase limits, who purchases the bond, how the funds are used, and how they’re reported to the IRS. 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.