Saving for College: Accounts Compared, Plus Priorities by Age

Saving for a child's education can feel overwhelming, especially alongside retirement, housing and day-to-day costs. The good news is that there are several tax-advantaged ways to save, and even modest, regular contributions started early can make a meaningful difference. This guide compares the main account types used in the United States, then lays out what to focus on at different ages. Rules and limits change, so check current details with the plan provider or a tax professional.

First, retirement

Many financial planners recommend making sure your own retirement savings are on track before saving heavily for college. Students can borrow for education through federal loans and receive grants and scholarships, but there are no loans for retirement. Ideally, both happen at once, even if college savings are smaller.

Comparing the accounts

529 plans. State-sponsored investment accounts designed for education. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses, including college tuition, fees, books, and room and board for students enrolled at least half time. Many states offer a state income tax deduction or credit for contributions to their own plan. Funds can also be used for some K-12 tuition up to an annual limit, for registered apprenticeships and, within limits, to repay student loans. Since 2024, unused 529 money can, under certain conditions, be rolled into a Roth IRA for the beneficiary, up to a lifetime limit of $35,000, if the account has been open for at least 15 years. Withdrawals for non-qualified expenses are subject to income tax and a 10 percent penalty on earnings.

Coverdell education savings accounts. Allow tax-free growth and withdrawals for qualified elementary, secondary and college expenses, but contributions are limited to $2,000 per child per year, and eligibility to contribute phases out at higher incomes. Funds generally must be used by age 30.

Custodial accounts (UTMA/UGMA). Accounts held in a child's name, managed by an adult until the child reaches the age of majority set by the state, often 18 or 21. The money can be used for anything that benefits the child, but it legally belongs to the child, who gains control at that age. Some earnings may be taxed at the parents' rate under the "kiddie tax" rules, and these accounts count more heavily against financial aid.

Roth IRAs. Some parents use their own Roth IRA as a flexible option. Contributions can be withdrawn at any time without tax or penalty, and earnings withdrawn for qualified education expenses avoid the 10 percent penalty, though they may be taxed. The money can stay invested for retirement if not needed for college.

Savings bonds. Interest on certain US savings bonds can be tax-free when used for qualified education expenses, subject to income limits.

How savings affect financial aid

The Free Application for Federal Student Aid, or FAFSA, treats assets differently. Parent-owned 529 plans are counted as parental assets, which are assessed at a maximum of about 5.64 percent when calculating aid eligibility. Assets owned by the student, including custodial accounts, are assessed at a much higher rate, 20 percent. Under the simplified FAFSA introduced for the 2024-25 school year, distributions from 529 plans owned by grandparents are no longer reported as student income, which has made grandparent-owned accounts more attractive. Private colleges that use the CSS Profile may treat assets differently.

By age: what to focus on

Birth to age 5. Open an account, often a 529, and set up automatic monthly contributions, even small ones. This is when compounding has the most time to work. Ask relatives to contribute to the account for birthdays and holidays instead of gifts. Many plans offer gift links for this.

Ages 6 to 12. Increase contributions as income allows, and review the investment mix. Age-based portfolios in most 529 plans automatically become more conservative as the child gets older.

Ages 13 to 17. Use a net price calculator, available on every college's website, to estimate actual costs after aid at schools of interest, which often differ greatly from published prices. Talk with your teenager about costs, in-state public options, community college pathways and scholarships. Shift money you will need soon into less volatile investments.

Senior year of high school. Submit the FAFSA as soon as it opens, apply for scholarships, and compare financial aid offers carefully, distinguishing grants and scholarships from loans. Coordinate 529 withdrawals with education tax credits, such as the American Opportunity Tax Credit, since the same expenses can't be used for both.

How much to save

There is no single right figure. Some families aim to cover a portion of expected costs, such as a third, with savings, and plan the rest from current income, aid and responsible borrowing. The College Board publishes annual figures on average tuition and fees for public and private colleges, which help set realistic expectations.

Common mistakes

• Saving for college while neglecting retirement or an emergency fund.
• Waiting until the child is older, losing years of growth.
• Choosing an out-of-state 529 without comparing fees and losing a state tax deduction.
• Withdrawing 529 money in the wrong calendar year, so expenses and withdrawals don't match.
• Assuming the published price is what you will pay, rather than checking net price after aid.