May 04, 2025 Personal Finance

Best Ways to Save for Your Child’s College Education

Written by:
Baylor Cox
Reviewed by:

If you’re planning on your children getting a college degree, there are several things to think about. Where to go, what to study — and how to pay for it — are all likely top of mind. Today’s high school students are choosing to attend college for better pay, more job opportunities, and meaningful careers.

Getting Your Head Around the Cost

It’s rare to scan the daily news without seeing an article about the increasing cost of going to college. When you add up tuition, room and board, books, and other expenses, the total cost of a year at a public or private college may seem impossible to reach.

The College Board is a not-for-profit organization whose mission is to connect students to college opportunity and success. This organization has been serving for more than 100 years and is a key source for college costs.

In its 2022 report, Trends in College Pricing and Student Aid, The College Board reports that a moderate college budget for an in-state student attending a four-year public college in 2022–2023 averages $27,940. For out-of-state students at public colleges, the average budget comes to $45,240. And for students attending private colleges, the average is $57,570.

For some historical perspective, the College Board reports that over the past 10 years, tuition, fees, and room and board have gone up 2% a year for public four-year universities. If you’re a parent with a baby, that means by the time your child is 18, it could cost nearly $40,000 a year for them to attend an in-state public university.

LPL Is Here to Help

This article will provide you with practical information about the resources available to help you save for college. In addition, it will cover some basic information regarding financial aid as well as student loans. Your financial professional at LPL Financial is always available to provide guidance, educate you on your savings options, and help your family create a solid plan to achieve this important financial goal.

College Savings Resources

529 Plans

A 529 Plan is an education savings plan operated by a state to help families set aside funds for future college costs. Named after Section 529 of the Internal Revenue Code, these accounts can be used for college, trade schools, and up to $10,000 of K-12 education costs, including tuition, room and board, and even a required computer. They can also help pay down $10,000 of student loans per student.¹

All states except Wyoming offer at least one 529 Plan. Anyone — a parent, grandparent, or friend — can open a 529 account, and you can invest in another state’s plan. The beneficiary can be anyone, even yourself, as long as the account owner is a U.S. citizen.

There are two types of 529 Plans:

  • Savings Plans: Work like a 401(k) or IRA by investing contributions in mutual funds or similar investments. Account value fluctuates based on performance.
  • Prepaid Plans: Let you prepay all or part of in-state public college tuition, locking in rates by purchasing units or credits. As of 2023, only nine states offer these, and credits usually apply only to tuition. Some plans allow transfer to other schools, but options may be limited — read details carefully.

Importantly, the person who opens the 529 account or prepaid plan owns and controls it, deciding how to invest, how to use withdrawals, and even who the beneficiary is.

Contributions to a 529 Plan

529 Plans have no income limits, no age limits, and no annual contribution limits. Initial minimum contributions often start as low as $25, with monthly contributions as low as $15 in some states. Many plans offer a convenient “set it and forget it” option with automatic investments linked to your bank account or payroll deductions.

There are lifetime contribution limits, which vary by plan, ranging from $235,000 to $550,000 (as of June 2023). In 2023, contributions up to $17,000 per beneficiary per account owner qualify for the federal annual gift tax exclusion. You can also combine five years’ worth of annual exclusion gifts at once (known as “superfunding”) — though you must file IRS Form 709 and check the box to treat the gift as spread over five years. It’s wise to consult your tax advisor about potential estate or gift tax consequences.

529 Plan Income Tax Benefits

Contributions to 529 plans are made with after-tax dollars. While contributions are not deductible on federal taxes, the earnings grow tax-free and are not taxed when withdrawn for qualified education expenses.

Additionally, over 30 states and the District of Columbia currently offer a full or partial state tax deduction or tax credit for 529 contributions. Check your specific state’s rules to see if you qualify.

If you take a withdrawal for non-qualified expenses, the earnings portion will be subject to federal — and possibly state — income tax. You may also face a federal 10% tax penalty on the earnings portion, plus potential state tax penalties.

Rollovers of 529 Plans to Roth IRAs

For a number of reasons, your plans can change, and your 529 plan savings may end up not being used for the original beneficiary or there may be leftover funds in the account.

The 2022 Secure 2.0 Act made it possible, as of 2024, to roll 529 funds over to a Roth IRA for the beneficiary without incurring penalties or taxes.

  • The lifetime rollover limit is $35,000, but the contributions for 2023 are subject to annual IRA limits ($6,500 and $7,500 for those over age 50).
  • The 529 must also have been open for more than 15 years.

Coverdell Accounts

A Coverdell Education Savings Account (ESA) is a tax-preferred savings and investment account designed to encourage people to save for future education costs.

Compared to 529 accounts, they are considered a lower-cost account option and offer a wider range of investment options, such as:

  • individual stocks
  • bonds
  • exchange-traded funds
  • mutual funds
  • real estate investments

There are some items to be aware of, including

  • The beneficiary of the Coverdell ESA must be under the age of 18 at the time the account is established.
  • The contribution limit is $2,000 per beneficiary per year. When accounts are established by different family members for the same child, total contributions cannot exceed $2,000 in a year for that beneficiary.
  • There is an income limit of $110,000 for individuals and $220,000 for married taxpayers filing jointly above which you cannot contribute to ESA accounts.
  • The low contribution limit means even a small annual maintenance fee charged by the financial institution could significantly affect your ESA investment return.
  • Your contribution goes into an account that will be distributed to your child at 30 years old if not used for college, unless the beneficiary has special needs. The earnings in the account will be income taxable and subject to a 10% penalty. You can change the beneficiary on the account or transfer the balance to another Coverdell or 529 plan, subject to certain rules.

Coverdell account income tax benefits

Earnings in ESA accounts are tax-deferred, just like 529 plans. Similarly, if withdrawals are used for qualified education expenses, as defined by the Internal Revenue Service, they are exempt from federal income taxes. If a withdrawal is used for non-qualified expenses, then the earnings portion of the withdrawal is subject to federal, and perhaps state, income tax. Also, in most cases, the earnings portion of withdrawals taken for non-qualified expenses is subject to a federal tax penalty of 10%, though there are some exceptions.

U.S. Savings Bonds

Some or all the interest earned on U.S. Savings Bonds may be excluded from income if used for higher education. The bonds must be Series EE bonds issued after 1989, or Series I bonds. Bonds must be issued in the name of the taxpayer 24 years or older.

Qualified expenses include tuition and fees and contributions to Coverdell and 529 accounts, but do not include textbooks or room and board. It’s important to remember to pay the education expenses the same year you cash the savings bond, and you must claim the credit on that year’s tax return.

UTMA and UGMA Accounts

Accounts set up under the Uniform Gifts to Minors Act (“UGMA”) and the Uniform Transfers to Minors Act (“UTMA”) have been used for many years to pay for college education.

One advantage is that a portion of the earnings in these accounts may be either tax-free or taxed at the child’s tax rate ($1,050 is tax-free, and the next $1,050 is taxed at the child’s rate). Earnings above this initial $2,100 are taxed at the parent’s tax rate until the child reaches the age of majority.

The disadvantage is that earnings are taxed at all (unlike 529 accounts).

Another disadvantage is once the child is no longer a minor, they control the account and how the money is spent. Depending on the state, one is no longer a minor between the ages of 18 and 25.

UGMAs and UTMAs can be rolled over into Section 529 Plans, but account control remains with the beneficiary once they are no longer a minor. Some financial planners suggest spending down the account for the benefit of the minor first. When the UGMA or UTMA balance is zero, then use the 529 plan for their remaining education expenses.

Please note these savings vehicles can be complicated, from both an estate planning and education funding standpoint. Please consult your financial planner, tax consultant, and estate attorney for more details.

This information is not meant to be comprehensive. These programs are complex and include many different income restrictions. Consult with your financial advisor and tax professional for advice appropriate to your individual situation.

Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker/dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. WeStreet Federal Credit Union and WeStreet Wealth Management are not registered as broker/ dealer or investment advisor. Registered representatives of LPL offer products and services using WeStreet Wealth Management, and may also be employees of WeStreet Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from and not affiliates of WeStreet Federal Credit Union or WeStreet Wealth Management.

Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker/dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. WeStreet Federal Credit Union and WeStreet Wealth Management are not registered as broker/ dealer or investment advisor. Registered representatives of LPL offer products and services using WeStreet Wealth Management, and may also be employees of WeStreet Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from and not affiliates of WeStreet Federal Credit Union or WeStreet Wealth Management.

The WeStreet Wealth Management site is designed for U.S. residents only. The services offered within this site are offered exclusively through our U.S. registered representatives. LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AL, AR, AZ, CA, FL, GA, KS, KY, LA, MS, MO, NE, NH, NJ, NC, OK, OR, TN, TX.

Securities and insurance offered through LPL or its affiliates are:

Not Insured by NCUA or Any Other Government AgencyNo Credit Union GuaranteeNot Credit Union Deposits or ObligationsMay Lose Value

WeStreet Credit Union (“WeStreet”) provides referrals to financial professionals of LPL Financial LLC (“LPL”) pursuant to an agreement that allows LPL to pay WeStreet for these referrals. This creates an incentive for WeStreet to make these referrals, resulting in a conflict of interest. WeStreet is not a current client of LPL for advisory services. Please visit https://www.lpl.com/disclosures/islpl-relationship-disclosure.html for more detailed information.

LPL Financial Form CRS

You are leaving the WeStreet website. Remember, we're just a click away if you need a dose of brightness in your day!

Please choose below.