College Savings Vehicles – Which is Right for You?

May 10, 2024

We all want to be able to provide our children with a clear path to success. Saving for a college education is an important goal for many parents, but at the same time, it can be difficult to know where your child will be in 18 years, what their goals will be, and how you can best support them. College savings plans can boost savings and reduce taxes, but if your child decides to take a different path in life and eschews college, it may be difficult to give them access to funds that were set aside for college. There are a variety of ways that you can save for your child’s future, each with its own benefits and drawbacks.

The most common college savings plan, 529 Education Savings Plans, have become more flexible recently as new rollover rules mean unused funds in the plan can be converted to a Roth IRA. That does not mean, however, that they should be the only choice when saving for college. There are a variety of other investment accounts that can be advantageous in planning for education expenses, and your circumstances and goals will determine which option is best for you.

529 plans have the advantage of being tax-sheltered accounts that give you tax-free withdrawals when used for qualified education expenses. There are also no limitations on who can open one or who can contribute. This makes them a popular vehicle for grandparents who wish to provide college funding for grandchildren. High gift-tax exclusions and the ability to frontload up to five years of contributions make them an efficient savings vehicle, but investment options in the accounts may be limited. With new rules in place, individuals can now roll over up to $35,000 from a 529 into a Roth IRA, barring eligibility requirements and annual limits.

Parents may want to consider sidestepping a 529-to-Roth rollover and instead set up a Custodial Roth IRA, but doing so does require that the child has earned income, such as from a part-time or summer. Contributions to these accounts grow tax-free but have limits to annual contribution limits, of up to $7,000 in 2024. Custodian Roth IRAs can provide the multifactor benefits of penalty-free qualified education withdrawals, but funds can also be used for qualifying home purchases or serve as an early start to your child’s retirement savings.

A simple brokerage account is a less common approach to college savings but has its own unique benefits. This vehicle can be a great educational tool for involving your children in the process by providing them with investing knowledge at an early age. Individual brokerage accounts do not offer the same tax advantages as other options, but they provide opportunities with their unrestricted contribution and withdrawal limits.

All three of the account options provided above have their own advantages and disadvantages. Understanding your goals for college savings will help determine which works best for you. For more information and guidance on education savings plans, please reach out to our financial planning team.