For most of us, paying for a child’s college education requires years of dedicated savings and hard work. With a marketplace with many options to help you save for college, it can be a challenge to know which strategy is right for you.

What are the pros and cons of the different college savings vehicles? Find out here.

College savings by the numbers

• 56% of US workers prioritize saving for a child’s education¹
• 58% of Americans believe four-year college is worth the cost¹
• $28,953 Average amount Americans save in their 529 accounts³

529 plan⁴

The standard for college savings

A state-sponsored plan designed specifically to save for college

Pros

• Tax-free growth of both contributions and earnings
• Tax-free withdrawals for qualified education expenses
• Tax deductions or credits available in some states⁵
• No income or age limits
• High contribution limits and the ability to front-load contributions
• Flexibility to pay for a wide variety of education-related expenses
• Beneficiary can be changed if the original doesn’t use all the funds
• Given favorable status in Federal Student Aid calculations⁶

Cons

• Penalties for non-educational use of funds
• Limited investment options
• Investment performance may not be as strong as other options
• Limited to one beneficiary at a time
• Contributions over $17,000 per year are subject to the gift tax⁷

Whole life insurance

A powerful option that many overlook

In addition to a death benefit, whole life builds cash value that can help you pay for college⁸

Pros

• Cash value grows on a tax-deferred basis and withdrawals are generally tax-efficient.⁹
• Cash value can be used for anything at any time
• Unlike a 529 plan, whole life is insulated from market performance

The Federal Student Aid methodology doesn’t include life insurance cash value when calculating expected family contribution¹⁰

Cons

• Cash value takes time to accrue
• Withdrawals may be subject to tax penalties if you are younger than 59½

Coverdell ESA ^11,12

A dedicated education custodial account

Lower contribution limits but more investment flexibility than 529s

Pros

• Tax-free growth of both contributions and earnings
• Tax-free withdrawals for qualified education expenses
• Wide range of investments available
• Flexibility to pay for a wide variety of education-related expenses
• Beneficiary can be changed if original doesn’t use all the funds
• Given favorable status in Federal Student Aid calculations[12]

Cons

• Low annual contribution limits
• Income limits — high earners may not qualify
• Contributions can only be made until beneficiary is 18 without tax penalty¹²
• All funds must be withdrawn by beneficiary by age 30 or be subject to income tax and a penalty tax¹²

Roth IRA¹³

A tax-advantaged retirement account

While intended for retirement, Roth IRAs can also help pay for college

Pros

• Tax-free growth of both contributions and earnings
• Tax-free withdrawal of contributions (but not earnings) at any time
• After age 59½, all funds can be withdrawn tax free
• Leftover funds can be used for retirement

Cons

• Low annual contribution limits ($6,500; $7,000 if age 50+)
• Income limits — high earners may not qualify
• Any earnings withdrawn before age 59½ are subject to taxes and penalties^{13, 14}
• Withdrawals are counted as income and can affect financial aid status

Custodial account (UGMA/UTMA)¹⁵

A general-purpose account for gifting to a child

While not designed for education, a very flexible option for gifting funds

Pros

• Easy to set up and manage
• Can be opened at most financial institutions
• Two types: Uniform Transfer to Minors Act (UTMA) for transferring funds, and Uniform Gift to Minors Act (UGMA) for gifting a variety of assets, including stocks, bonds or life insurance
• Custodian has full control over the account
• Up to $2,300 in unearned income per year is untaxed or taxed at the child’s lower tax rate¹⁶
• No limits to how funds can be used

Cons

• No tax advantages after first $2,300 per year in unearned income¹⁶
• Counted as an asset for your child and so can affect financial aid status¹⁷

One key thing to remember when making your college savings strategy: there’s no need to choose just one approach. For example, you can combine a 529 savings plan and whole life insurance, paying for a portion of your child’s education using both.

A financial professional can help

Not sure which college savings strategy is right for you?

A financial professional can help! They’ll give you professional, unbiased perspective on how you can save for college and choose the savings vehicles that work best for your circumstances.

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2023-154454 (4/25)