facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
What is the Best Way to Save for College? Thumbnail

What is the Best Way to Save for College?

Michael Baum, CFP® RICP®
Vice President & Associate Financial Advisor 

For many families, saving for their children's or grandchildren's college education is a top financial priority. With the rising costs of higher education, it's important to start planning and saving early to ensure you have the funds available when the time comes. Fortunately, there are several tax-advantaged savings options available to help you reach your educational goals. In this article, we'll explore the different college savings programs and discuss their pros and cons to help you determine the best approach for your situation. 

529 College Savings Plans 

One of the most popular and flexible options for college savings is the 529 plan. These state-sponsored investment accounts offer significant tax benefits when used for qualified education expenses, such as tuition, fees, room and board, books, and supplies.

The primary advantage of 529 plans is that your contributions grow tax-deferred, and withdrawals are tax-free when used for eligible expenses. Additionally, over 30 states offer a state income tax deduction or credit for 529 plan contributions, further enhancing the tax benefits.2 

Another key benefit of 529 plans is that they have no annual contribution limits, allowing you to save as much as you need for your family's education costs. However, contributions above $18,000 per year (for 2024) may be subject to gift tax.3 

529 plans also offer flexibility in terms of beneficiary changes. If your intended beneficiary doesn't use the funds for education, you can transfer the account to another eligible family member, such as a spouse, child, grandchild, or first cousin.4 

Coverdell Education Savings Accounts (ESAs)   

Coverdell Education Savings Accounts (ESAs) are another option for saving for education expenses. While not as popular as 529 plans, ESAs offer some unique advantages. 

One of the main benefits of ESAs is that you have more control over how your contributions are invested. With a 529 plan, you're limited to the investment options offered by the plan, but with an ESA, you can choose from a wide range of investments, including stocks, bonds, and mutual funds.5 

However, ESAs come with stricter contribution limits and income restrictions. You can only contribute up to $2,000 per year per beneficiary, and the ability to contribute phases out at higher income levels ($110,000 for single filers and $220,000 for joint filers in 2023).6   

ESAs also have age restrictions for beneficiaries. Contributions can only be made until the beneficiary reaches age 18, and all funds must be withdrawn before the beneficiary turns 30.5 

Like 529 plans, ESA contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses. However, ESAs have a broader definition of qualified expenses, including certain K-12 expenses not covered by 529 plans.  

read more below

image of Weiss, Hale & Zahansky Strategic Wealth Advisors Fearless Flyer e-newsletter

View previous campaigns.

get started on living well 

Subscribe to the Fearless Flyer

Get the financial tips and insights you need to fearlessly pursue your goals, plus access to subscriber-only benefits like our Tax Resource Center and more.

* indicates required

Roth IRAs for Education Savings 

While not specifically designed for education savings, Roth IRAs can also be a viable option for funding college expenses. Starting in 2024, new legislation will allow unused funds from 529 plans to be rolled over into a Roth IRA without incurring penalties or generating taxable income, subject to certain conditions. 

Additionally, you can use a Roth IRA for education savings from the start. Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals, including those for education expenses, are completely tax-free. 

Using a Roth IRA for education expenses offers some advantages, such as no age limits or restrictions on when you can use the money for qualified expenses. However, withdrawing funds from a Roth IRA may impact your retirement savings goals, so it's generally recommended to prioritize dedicated education savings accounts like 529 plans over using retirement accounts for college funding, if possible. 

Choosing the Right College Savings Strategy   

When deciding on the best way to save for college, it's important to consider your specific financial situation, investment goals, and tax implications. Here are some key factors to consider:  

  1. Tax benefits: Evaluate the potential state and federal tax benefits of each savings option to maximize your tax savings.
  2. Investment flexibility: Determine how much control you want over the investment choices for your college savings.  
  3. Contribution limits: Consider the annual and lifetime contribution limits of each savings vehicle to ensure you can save enough for your education goals.
  4. Beneficiary flexibility: Assess the importance of being able to transfer the savings to another family member if your intended beneficiary doesn't use the funds.
  5. Qualified expenses: Understand the types of expenses that are eligible for tax-free withdrawals from each savings account.  
  6. Retirement savings impact: If considering using a Roth IRA, evaluate the potential impact on your retirement savings goals.  

By carefully evaluating these factors and consulting with a financial advisor, you can develop a comprehensive college savings strategy that aligns with your goals and financial situation. Starting to save early and taking advantage of tax-advantaged savings options can help ensure you have the funds available when it's time for your loved ones to pursue their educational dreams.  

Our team of advisors at Weiss, Hale & Zahansky Strategic Wealth Advisors is available to discuss the various education savings options and help you determine the best strategy based on your goals and tax situation as part of our strategic  Plan Well, Invest Well, Live Well™  process. Schedule a  complimentary consultation  on our website or call us at (860) 928-2341.     

Authored by Vice President, Associate Financial Advisor, Michael Baum, CFP® RICP®. Securities and advisory services are offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.   

  1. https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan
  2. https://www.savingforcollege.com/compare-529-plans/state-tax-deductions
  3. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes 
  4. https://www.thebalancemoney.com/transferring-529-plans-to-another-beneficiary-4157853
  5. https://www.savingforcollege.com/article/coverdell-esa-versus-529-plan
  6. https://www.calcpa.org/public-resources/ask-a-cpa/education/saving-for-college/coverdell-education-savings-accounts    

You & Your Money Podcast

Tune in for market updates and financial tips to help you Plan Well, Invest Well and Live Well.

Listen & Subscribe

WHZ on YouTube

Quick Tip videos designed to empower you to reach your financial life goals.

Watch & Subscribe

More News & Resources

Loading Posts...

Read More