Beyond 529: Exploring Alternative Paths to Secure Your Child's Education Fund

We all know the value of education. And while most parents want to do everything they can to provide their children with the best shot at success, the cost of a college education can be downright daunting.

It's never too early to start saving, but unfortunately, only about 48% of families with a high school child have saved anything at all for that education. The average savings? Just $26,266, less than a year of tuition at most four-year schools.

The good news is that there are plenty of options that can make saving for college a breeze, and you don't have to be a millionaire to take advantage of them.

The 529 plan is often hailed as the go-to strategy for college savings, but there are other pathways savvy families can take to secure their children's educational future.

Whether you're just starting to build your child's college fund, or reassessing your current strategy, this guide is here to help you explore your options. 

What is a 529 Plan?

First, let's talk about the basics of the 529 plan: the classic choice. 

A 529 Plan is a tax-advantaged savings plan designed to help families save for future education costs. It comes in two forms: pre-paid tuition plans and education savings plans (below, we'll explore these as alternatives just to give you a detailed look at all of your options).

These plans are sponsored by states, state agencies, or educational institutions, and are authorized by Section 529 of the Internal Revenue Code.

Contributions to a 529 Plan grow tax-free, and withdrawals are tax-exempt when used for qualified education expenses. These typically include tuition, room and board, books, and other supplies required by the educational institution. 

Many states also provide tax deductions or credits for 529 Plan contributions.

What's a Disadvantage of a 529 Plans?

Despite the tax breaks and benefits, 529 Plans have certain limitations that may not make them the ideal choice for every family. 

One of the most significant drawbacks is the limited investment choices within the plan. Often, the state-sponsored control of these plans means fewer investment options, and as we know, diversification is a key principle of sound investing. 

Until 2024, 529 Plans also had tax and penalty implications if the funds were not used for qualified educational expenses. Now, the SECURE 2.0 Act allows families to roll unused 529 funds into the beneficiary's Roth IRA without a penalty, which is helpful.

With that said, it's important to note that 529 Plans can still affect financial aid eligibility. While assets in a parent-owned 529 Plan are generally considered parental assets for the purposes of federal financial aid, distributions from the plan can count as student income, which is assessed at a higher rate.

Is There Anything Better Than a 529 Plan?

The 529 isn't the only kid in town. Let's talk about some other investment vehicles that may be able to help you meet your education savings goals.

Again, we'll go into more detail about 529 prepaid tuition plans, too, even though these are technically considered to fall under the 529 umbrella - just so you can compare your alternatives to the traditional 529 savings plans.

1. Roth IRA

A Roth IRA isn't specifically designed for education savings, but it can be a powerful tool for this purpose. Contributions to a Roth IRA are made with after-tax dollars, meaning that the principal (not the earnings) can be withdrawn at any time without taxes or penalties. 

The biggest benefit? There's some flexibility if your child does not end up using the funds for educational purposes. However, using earnings for non-educational expenses may still result in taxes and penalties.

A Roth IRA used for education savings must be carefully balanced against retirement needs, as regulations require that the account holder be at least 59½ years old to avoid penalties and taxes on earnings. 

2. Brokerage Account

A regular brokerage account doesn't offer the same tax advantages as a 529 Plan or an IRA, but it provides the most flexibility in terms of fund use and investment choices. 

You can invest in all kinds of stocks, bonds, mutual funds, and other securities. This will give your education savings the best possible chance to grow with the market.

Brokerage accounts provide the advantage of investing in any security you choose, but they don't offer the same tax benefits specifically for education savings. 

They're an excellent option for parents who have maxed out contributions to other tax-advantaged accounts or who want to save for education with a more flexible timeline.

3. Life Insurance

Some permanent life insurance policies have a savings component that accumulates cash value over time. While life insurance can be a controversial choice for college savings, it does offer a death benefit in addition to the ability to grow cash value tax-deferred. 

Of course, you'll want to weigh the costs and benefits carefully and consider it as part of an overall insurance and financial strategy. It's not necessarily the best option in and of itself and shouldn't be your only source of education savings. 

You will also want to take some time to understand the policy's costs, fees, and riders.

4. Education Tax Credits

Tax credits like the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit can also offset the costs of higher education. 

While not a savings plan in itself, these credits can significantly reduce the tax burden on education expenses. These credits are generally mutually exclusive with funds from a 529 Plan or other education savings accounts when covering the same expenses.

However, tax credits can provide immediate and substantial relief from college expenses. Remember that eligibility for these credits is subject to income limitations and may differ under tax law changes. 

In other words, what you plan for now may not necessarily exist or be applicable by the time your child is ready to attend college.

5. Coverdell Education Savings Account

Similar to a 529 Plan, a Coverdell ESA is a tax-advantaged account designed to encourage savings for education. It offers a broader range of investment options than many 529 Plans, but it also has a much lower annual contribution limit of $2,000 per beneficiary. The use of Coverdell ESA funds is not limited to higher education but can also be used for K-12 expenses.

A Coverdell ESA can be a great flexible tool in the education savings toolbox. It allows for investments in a wide range of assets and can be used for private and parochial school expenses from kindergarten onwards.

6. 529 Prepaid Tuition Plans 

While we're talking about looking beyond 529 Plans, it's worth noting that prepaid 529 Plans can be an excellent option for some families. Again, these are technically under the umbrella of 529 plans.

With a prepaid tuition plan, you lock in tuition rates at eligible colleges and universities, offering a hedge against future tuition inflation. However, these plans can be restrictive in terms of usage and may apply only to in-state institutions or a limited set of higher education options.

With a 529 prepaid tuition plan, you are essentially making a bet on future tuition rates. If your child ends up attending one of the eligible institutions, you could save a significant amount, but if they don't, the plan's benefits may be limited.

7. Education-Focused Savings Accounts

Some financial institutions offer specialized savings accounts designed for education expenses. These accounts may have advantages and limitations, so it's worth comparing them with other options, including 529 Plans, before making a decision.

These specialized savings accounts often offer the convenience of a standard savings account, coupled with tax benefits and potential interest or investment returns. 

However, they vary widely in terms of fees, contribution limits, and investment options.

8. Custodial Accounts

Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) custodial accounts allow you to invest on a child's behalf with the funds becoming the child's property at the age of majority (usually 18 or 21, depending on the state). 

While these accounts have the advantage of low costs and the flexibility to use funds for any purpose, they don't offer the tax benefits of 529 Plans or IRAs.

Custodial accounts can offer tax benefits, but they also come with restrictions on how the funds are used once the child reaches the age of majority. While they are a great way to teach financial responsibility, careful consideration must be given to how and when the funds are used.

A newer entrant onto the education savings scene, EarlyBird is a mobile app that empowers parents, family, and friends to give the gift of education. This custodial account system is user-friendly and highly social. It allows for collective family contributions and transparent beneficiary and investment management.

EarlyBird's social and collaborative approach to education savings can be particularly appealing for parents who want to involve family and friends in their child's future. 

How Many Types of College Savings Plans Can You Have?

One common question among parents is whether they can have multiple college savings accounts for their child. 

The short answer is yes, you can have as many different types of accounts as you like, but managing and coordinating them may require careful planning to maximize their benefits.

For example, a family might contribute to a 529 Plan for the tax benefits and then use a brokerage account for its flexibility. They might also utilize a Roth IRA for additional tax-free growth opportunities, and an EarlyBird account to involve the extended family in the savings effort.

Turn to EarlyBird to Secure Your Child's Future Education

In the complex landscape of education savings, a one-size-fits-all approach simply does not exist. 

With EarlyBird, your child's educational dreams can finally become a reality.

Whether you choose to supplement your 529 Plan with a Roth IRA, explore the benefits of life insurance, or engage in a collaborative savings effort with EarlyBird, the key takeaway here is to start early, stay informed, and be proactive. 

In doing so, you can build the educational foundation that will support your child's lifetime of achievements.