Several alternatives to 529 plans can help families save for education, including ESAs, Roth IRAs, high-yield savings accounts, brokerage accounts, and prepaid tuition plans. Each option offers different levels of flexibility, tax benefits, and investment potential. The most effective option choice depends on your family’s financial goals, savings strategy, and education funding needs.
As parents, you want the best for your children. You may be focusing your financial planning on helping to ensure that they have a good inheritance. At the same time, you want them to find a career they love, as well as one that provides for their needs.
The two of these are not mutually exclusive. In fact, it could be argued that preparing your children for success in education is part of their inheritance. You can be more encouraged about their future when you know they have the ability to care for their own financial needs, rather than just relying on the money that you provide for them.
These days, college is more expensive than ever. According to NPR, a study shows that, when adjusted for inflation, college tuition has nearly doubled over the last 30 years. On top of that, student loan debt has reached $1.6 trillion.
So what can you do to try to minimize the effects of rising tuition costs for your child? 529 plans can certainly help your child avoid paying for their education solely with student loans. However, there are other options that may fit your family. If you’re looking for an alternative to 529 plan savings, there are several candidates worth considering.
As we have already addressed 529 plans in other articles, here we will give you alternatives to 529 plans, along with reasons to use them.
What Are The Basics of 529 Plans?
First off, to be clear, we are not saying that you should not use 529 plans; we are simply giving you other options to use alongside them. Though there are a few minor drawbacks to 529 plans, they are generally a solid way to provide for your child’s education.
If you’re new to 529 plans, they are a tax-advantaged savings plan that you can set up through the state for education savings.
A 529 plan allows you to use the funds for qualified educational expenses. While at one point the uses were very restrictive, the One Big Beautiful Bill has expanded the ways and types of education for which the funds can be used.
Did you know that you can shop for 529 plans in other states? Some states have more profitable investments in their 529 plans. First, see if your state offers tax deductions for staying in-state. If they don’t, feel free to find the state with the best return on investment!
What Are 10 Good Alternatives To 529 Plans?
Whether you decide that you would like to diversify your child’s higher education savings or find that a 529 plan does not fit your needs, there are alternatives to 529 plans.
1. Coverdell Education Savings Account (ESA)
A Coverdell Education Savings Account, formerly known as the Education IRA, can be an effective alternative to 529 plan savings because it offers a wider range of investment opportunities.
Some of the differences include that you can only deposit $2,000 into a Coverdell Education Savings account annually. Additionally, any money in the ESA would go to the child if it is not used for college, rather than being refunded to the parent, as is the case with a 529 plan.
2. Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA)
UGMAs and UTMAs are custodial accounts. These are used by guardians of minors as opposed to parents.
On the upside, the accounts offer great flexibility in the assets that can be placed in them. Deposits can be in the form of cash, real estate, stocks, or bonds.
On the downside, they do not offer any tax advantages like 529 plans, they are considered the child’s property and, unlike some of the other options, can affect your child’s eligibility for financial aid.
3. Prepaid Tuition Plans
Prepaid tuition plans give you a chance to freeze tuition rates, which can be a very attractive alternative to 529 plans. However, they can also be very inflexible.
Prepaid tuition plans only cover tuition, meaning you still have to pay for housing, food, textbooks, clothing, transportation, and any school fees. Also, only 9 states offer them, and each state plan comes with its own features and requirements. On top of that, only certain colleges or universities within those states are a part of those plans.
4. High-Yield Savings Accounts
As the name suggests, high-yield savings accounts provide higher interest rates than traditional savings accounts. They are stable and covered by FDIC guarantees.
Additionally, they are flexible when it comes to how you choose to use the money, so if your child would like to take a gap year and travel or volunteer before starting college, you could use the money for that. Also, there is no limit to how much you can put into the account.
These accounts can be good alternatives to 529 plans or ESAs if you can contribute annually to them. For the best interest rates, consider using an online bank, since they do not have to cover the cost of brick-and-mortar locations. You can look for online high-yield savings accounts on bankrate.com or nerdwallet.com. Feel free to reach out to us directly to discuss some of these options.
5. Roth IRAs
You are probably most familiar with Roth IRAs as retirement vehicles. And they are, but your Roth IRA funds can also be used for qualifying educational expenses. However, there are some limits and income requirements, as well as the requirement that the account be open for a minimum of 5 years.
We do recommend exercising caution when using a Roth IRA as an alternative to 529 plans. After taking the disbursements for higher education, you would either forfeit that money for your retirement or you would have to work to replenish it. As an added bonus, Roth IRA funds being used for qualified education expenses are not taxable when withdrawn.
6. Brokerage Accounts
Brokerage accounts are simply accounts that you set up to invest in the stock market. They offer a lot of freedom, with no annual limits, greater control over your investments, and the ability to use the money for any education expense.
There are a couple of drawbacks to using them as alternatives to 529 plans. Because you are investing in the stock market, the money is not guaranteed. It could go up or down, and you could lose a little or a lot of your money depending on when you sell the stocks. Furthermore, there are no tax advantages to using this money to cover college expenses, especially when you consider that stock sales are often taxable events.
7. Whole Life Insurance Policies
One benefit of whole life insurance policies can be that they can build cash value over time, and you can borrow against that value. As with other alternatives to 529 plans, there are no restrictions as to how you spend the money.
However, use caution when considering this option. Drawing from the cash value would likely decrease the death benefit if not repaid. This could put any dependents who would need that money, if you were to pass away, at risk.
8. Unused 529 Plan Funds
At first, it might sound odd to have this on the list. While each child in your family can have their own 529 plan, this could be an option for households with more than one child, especially if there is a significant age gap between them.
There are many ways to use unused 529 plan funds, and one is to transfer the money to a relative’s 529 plan. This could be a sibling, cousin, or even a grandchild. One benefit of transferring unused 529 plan funds can be that it can keep the taxes you may need to pay lower than if you just took the money out as an unqualified disbursement.
9. Having Your Child Work Part-Time Or During The Summer
Encouraging your child to help pay for their own education has many benefits. A big benefit of having them work while in school, or at least during their time off, is that it may help them take ownership of their education. This ownership could allow them to take their classes and school work more seriously than other students because they have a vested interest in being there.
Working also teaches soft skills that are not necessarily learned in the classroom and are not often taught in a textbook. Those skills could include communication, time management, and budgeting. It can also provide them with experience, opportunities, and a job reference upon graduation.
10. Student Loans
Even with all the good alternatives to 529 plans on this list, it may still be necessary to take out student loans. We recommend that you first go with federal student loans if you qualify. Unlike private student loans, federal loans offer more than one payment option that you or your student may need to use at some point. Similarly, federal student loans can offer deferment or forbearance if either of those becomes necessary.
How Do You Determine Which Alternatives To 529 Plans Are Best For Your Situation?
Here at Iron Point Financial, we understand all of the confusion, overwhelm, and frustration there can transpire around paying for your child’s education. We have just provided you with a lot of information about finding the right alternative to 529 plan savings strategy for your family’s unique situation.
We would love the opportunity to meet with you to examine ways to meet your child’s educational needs based on your specific situation. We are family-and stewardship-focused, and we want to help set you and your child up for financial success for generations to come.
You don’t have to do this alone. Our experienced CFPs® and RICP®s will sit down with you and take time to learn your passions, life goals, and dreams.
Why not schedule an appointment today to meet with an Iron Point Financial CFP® or RICP®? A little help now could set your children up as good financial stewards for many generations.
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Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
Further Reading
General Disclosures
- All investing involves risk, including the possible loss of principal.
- There is no assurance that any investment strategy will be successful.
Roth IRA Disclosures
- A Roth IRA offers tax free withdrawals on taxable contributions.
- To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum).
- Depending on state law, Roth IRA distributions may be subject to state taxes.
Municipal Fund (529 Plan) Disclosures
- Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing.
- This information is found in the issuer’s official statement and should be read carefully before investing.
- Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.
- Any state-based benefit should be one of many appropriately weighted factors in making an investment decision.
- The investor should consult their financial or tax advisor before investment in any state’s 529 Plan.
FAQs
What can be the best alternative to a 529 plan?
The best alternative to a 529 plan depends on your goals. Popular options include Coverdell ESAs, Roth IRAs, brokerage accounts, and high-yield savings accounts.
Can I save for college without a 529 plan?
Yes. Families can use ESAs, custodial accounts, Roth IRAs, brokerage accounts, and other investment vehicles to save for education expenses.
Is a Roth IRA better than a 529 plan?
A Roth IRA offers more flexibility because funds can be used for retirement or education. However, 529 plans generally provide stronger education-specific tax benefits.
What happens if my child doesn't go to college?
Many alternatives to 529 plans allow unrestricted use of funds. Even 529 plans now offer additional flexibility through beneficiary changes and Roth IRA rollovers.
