There probably isn’t anyone out there who doesn’t know that college costs keep going up. According to the College Board’s Trends in College Pricing 2025, the average published tuition and fees for the 2025–2026 school year is $45,000 at private nonprofit colleges, $31,880 for out-of-state students at public schools and $11,950 for state residents at public colleges. Unless you’re wealthy, these costs make many parents and future students wonder how they’ll be able to afford college prices. It seems like an article about the cost of college is written every year for as long as I can remember.

The classic advice is to use a 529 to save for your kids college education. Here, we’ll list out the set of options that are possible ways to save for college from the conventional to the less conventional.

529 Savings Plan

What is it?

529 savings plans are flexible, tax-advantaged accounts designed specifically for education savings for a student of any age. 529 plans let families set tax-deferred money aside for a child’s future education costs. Typically, a parent or grandparent opens the account and names a child or other loved one as the beneficiary. 529 plans were created to cover higher education expenses, but they can also be used to pay for some K-12 costs in certain states, with limitations that depend on the plan.

Every state offers its own 529 plan, and some private colleges and universities do too. Each plan is sponsored by an individual state, often in conjunction with a financial services company that manages the plan, although you don’t have to be a resident of a particular state to invest in its plan. 30+ states also offer residents additional state tax breaks on contributions (usually though not always for residents only).

Despite their advantages, only 32% of families use 529 plans to help pay for college, according to Sallie Mae’s “How America Pays for College 2025.”

There are actually two types of 529 plans:

Prepaid Tuition Plans

A prepaid tuition 529 plan lets you prepay college tuition costs at today’s prices. It’s usually reserved for in-state public colleges and universities. While tuition and fees can be prepaid, room and board cannot. These plans aren’t guaranteed by the federal government, but some states back their plans and promise to provide funding if the program encounters financial issues. Not all colleges and universities participate, which could also limit where your child can attend school.

Savings Plans

A 529 savings plan lets you put after-tax dollars in investments like mutual funds and exchange traded funds (ETFs), and your money then grows tax-free. The earlier you open a 529 savings account, the longer the funds have to grow. These plans are usually sponsored by state governments and managed by financial services firms. Most states don’t require you to attend in-state public colleges using 529 money.

From what I can see, prepaid tuition plan makes sense only if you can guarantee your child will attend an in-state, public school, and only a few states currently offer prepaid 529 plans. Turns out, the history of 529 plans have their origin in prepaid tuition plans.

529 Savings Plans are the more popular and often better versions. They allow you to invest in stocks and bonds via preset investment menus. You can buy many yourself (direct-sold), and these are generally recommended because they’re cheaper. The remainder are sold by financial advisors; advisor-sold plans often have more investments but can be pricier because their expenses may include the cost of financial advice. 

Direct-sold and advisor-sold college-savings plans come in two main varieties:

Age-based: The portfolio automatically shifts from risky, higher-earning securities (stocks) to less-risky investments (bonds) as your child nears college. This helps protect your money from being wiped out in a market downturn shortly before you’ll need to pay tuition bills. 

With some age-based plans, you can fine-tune the stock and bond exposure by choosing an aggressive (more equity) or conservative (less equity) track. Others let you choose between an active or passive portfolio. 

Static: The investment portfolio remains the same, or static, over time unless you manually adjust it. 

A static portfolio lets you cook your own college-savings meal using ingredients from a preset investment menu: stock funds, bond funds, and balanced funds, which contain a set proportion of stocks and bonds. 

How Do I Find the Best 529 Plan?

529 plans are state-sponsored, but you can pick a plan from any state. These resources list out the top rated 529 plans:

Morningstar’s Best 529 Plans of 2025 (now published as “Medalist Ratings”). This annual report comes out each autumn; in the 2025 edition, five plans earned Morningstar’s top Gold rating — Alaska, Illinois, Massachusetts, Pennsylvania, and Utah.

Saving For College has their own top 529 Plans list. Somewhat confusing because there isn’t any overlap in top recommendations with Morningstar’s list.

Pros:

  • Any earnings grow tax-deferred and qualified distributions are federal income tax free
    • No capital gains tax, ordinary income tax, or Medicare surtax
    • But each withdrawal from a 529 plan consists of both a contribution and an earnings portion
  • Gift and estate tax benefits1
    • Account owner may contribute up to $19,000 per year (the 2025 and 2026 annual gift-tax exclusion), per 529 account, without incurring federal gift tax. You can also “superfund” the account by making a contribution of up to $95,000 (or up to $190,000 for a married couple), then electing to treat the contribution as having been made over a five-calendar-year period for tax purposes (see IRS rules here)
    • Money contributed to a 529 plan account is generally considered removed from the owner’s estate
  • State tax deduction depending on your state of residence and the specific 529 plan
  • Low contribution minimum
    • Account minimums vary by firm, but many require little or nothing to open (e.g., Fidelity has no minimum and no annual account fee) with automatic monthly contributions
  • High maximum contribution limits
  • Contributions not limited by the income of the account owner
    • You can ask friends and family to make gifts to your child’s college savings account instead of new toys at birthdays and holidays. Those extra contributions can help boost your saving efforts
  • You can take withdrawals from a 529 plan to pay for qualified education expenses for more than just college-level education
  • Low impact on financial aid
    • Many families worry that saving for college will hurt their chances of receiving financial aid. But, because 529 savings plan assets are considered parental assets, they are factored into federal financial aid formulas at a maximum rate of about 5.6%. This means that only up to 5.6% of the 529 assets are included in the Student Aid Index (SAI) — the figure that replaced the Expected Family Contribution (EFC) beginning with the 2024-25 FAFSA — that is calculated during the federal financial aid process. That’s far lower than the potential 20% rate that is assessed on student assets, such as assets in an UGMA/UTMA (custodial) account.
  • No required distributions
  • Beneficiary can be changed at any time
    • Account owner may transfer account at any time to another member of original beneficiary’s family3
  • Account owner maintains control over distribution of assets so owner can assure the money will be used for its intended purpose
    • Contributions considered revocable gifts
    • Owner controls the account; child is beneficiary
  • No age limit for the beneficiary
  • There are no time limits imposed on 529 plans
    • Beneficiary may keep contributing to a 529 plan throughout college or after graduation and use any leftover funds to repay student loans tax-free
  • Unused 529 funds can now be rolled into the beneficiary’s Roth IRA
    • Thanks to the SECURE 2.0 Act (effective 2024), up to a $35,000 lifetime maximum can be moved from a 529 into the beneficiary’s own Roth IRA, tax- and penalty-free. The account must have been open at least 15 years, each year’s rollover is capped by the annual Roth contribution limit (so reaching $35,000 takes several years), and the beneficiary needs earned income — but there are no Roth income limits on the rollover. This is a strong answer to the classic “what if my child doesn’t use all the money?” worry.

Cons:

  • 529 Accounts have fees – though these fees have decreased over time
  • Person who creates the 529 account (account owner) must be 18 years or older, must be a U.S. citizen and must have a Social Security number or Tax ID
  • Plans are limited to one beneficiary at a time; families with multiple children may need more than one
    • The key to really get the most out of the investment in a 529 account is to start as early as possible. The later parents wait to open a 529, the less time for the money to grow. So, if you as parents are proactive enough to start making contributions when your children are babies, compounding will help you grow these funds significantly. But if you wait until your kids are teenagers, it’s not going to be that great of an investment.
  • Since this is an investment account, it does carry some risk, and there’s a chance you could lose money
    • For example: You cannot control the stock market’s performance and how that correlates to when your child needs college funds. It may be that your child enters college during the equivalent of 2008-2012 years when their 529 has lost half its value. Unfortunately, there’s really nothing you can do to control that and this is probably one of the biggest downsides of 529s
  • Although account owner chooses from portfolios with different exposure to equity and fixed income, the investment options are limited to mutual funds and exchange traded funds (ETFs)
    • For some families, their current investing strategy may outweigh the tax benefits of 529s, especially given the sub-par investment choices some 529s plans offer
  • If the investment earnings portion of the withdrawal is not used for qualified education expenses it will incur taxes and a 10% penalty. Those withdrawing funds for nonqualified expenses may also be required to pay back any state tax deduction they’ve received on contributions
    • Generally at the college or graduate level, funds from a 529 plan can be used for tuition, fees, books, supplies, approved study equipment, and room and board for a full-time student at an accredited institution
      • BUT if your child decides not to go to college, gets a full scholarship, or ends up attending a US military academy – there are options for these and other scenarios
        • A parent can transfer the 529 plan to a family member such as a sibling, first cousin or aunt, or even to themselves, to use for qualified education expenses
          • Although the owner may change the beneficiary, the eligible parties are limited, and risk-averse contributors should consider carefully in the beginning whether they believe there will be a qualified beneficiary, or if this option will even be desirable. Furthermore, changing the beneficiary does not help the original intended beneficiary. Maybe the child receives scholarships and grants. Should that child’s hard work be rewarded by passing their college fund down to a brother or sister?
        • Starting in 2026, up to $20,000 per year (raised from $10,000 by the 2025 One Big Beautiful Bill Act) can be applied toward K-12 tuition — and, as of mid-2025, a broader set of K-12 costs such as books, curricular materials, tutoring, and standardized-test fees — for elementary, middle, and high schools (private, public, or religious). Although the money may come from multiple 529 accounts, it is aggregated on a per beneficiary basis, and any distribution in excess of the annual limit is subject to income tax and a 10% federal penalty2
        • You can withdraw the amount of any scholarship awards from your 529 without penalty; federal and state income taxes on the earnings still apply
        • Can withdraw money anytime, with any earnings on nonqualified distributions subject to federal income taxes at the recipient’s rate as well as a 10% federal penalty
          • Distributions from 529s are made up of contributions and earnings in proportion to their levels in the account. That means that the portion of the withdrawal that is made up of your contributions would be tax-free and penalty-free but the earnings portion would be subject to taxes and the 10% penalty
        • Following the Setting Every Community Up for Retirement Enhancement Act’s (a spending bill known as the SECURE Act) enactment in January 2020
          • 529 beneficiaries can pay for qualified expenses related to apprenticeships with tax-free distributions. Funds from a 529 can be applied to expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act
          • Additionally, the law includes an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary and $10,000 per each of the beneficiary’s siblings. Siblings may include a brother, sister, stepbrother or stepsister.
          • The SECURE Act made both changes retroactive, so any 529 distributions for apprenticeships or student loans made after December 31, 2018, are tax-free under the new law

1. In order for an accelerated transfer to a 529 plan (for a given beneficiary) of $95,000 (or $190,000 combined for spouses who gift split) to result in no federal transfer tax and no use of any portion of the applicable federal transfer tax exemption and/or credit amounts, no further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the five-year period, and the transfer must be reported as a series of five equal annual transfers on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If the donor fails to survive the five-year period, a portion of the transferred amount will be included in the donor’s estate for estate tax purposes. Reference here

2. The Tax Cuts and Jobs Act of 2017 first expanded 529 plans to cover K-12 private school tuition, up to $10,000 per year. The 2025 One Big Beautiful Bill Act later raised that K-12 limit to $20,000 per year beginning in 2026 and broadened the eligible K-12 expenses beyond tuition

3. For 529 accounts only, the new beneficiary must have one of the following relationships to the original beneficiary: 1) a son or daughter; 2) stepson or stepdaughter; 3) brother, sister, stepbrother, or stepsister; 4) father or mother or an ancestor of either; 5) stepfather or stepmother; 6) first cousin; 7) son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; or 8) son or daughter of a brother or sister. The spouse of a family member (except a first cousin’s spouse) is also considered a family member. However, if the new beneficiary is a member of a younger generation than the previous beneficiary, a federal generation-skipping tax may apply. The tax will apply in the year in which the money is distributed from an account. Reference here

References:

Fidelity’s “The ABCs of 529 savings plans”

Fidelity: 6 things you may not know about 529 plans

Forbes “How To Fit 529 Plans Into Your College Savings Strategy”

Morningstar “What is a 529”

Voya: Maximizing the Value of 529 Plans

Custodial Account (Uniform Gifts to Minors Act [UGMA]/Uniform Transfers to Minors Act [UTMA] account)

What is it?

The Uniform Gift to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are custodial accounts that allow you to invest for a college education or any other expense that benefits the minor. Funds in the account are considered an irrevocable gift that becomes the minor’s assets once they reach age of termination.

Distributions must be used for minor. Account owner controls the account until it is transferred to the minor at the age of termination.

Before the introduction of state-run 529 college savings plans, many parents invested for their children’s education and other major financial goals through UTMA or UGMA custodial accounts. When states began rolling out 529 college savings plans in the 1980s and ’90s, UGMA and UTMA accounts lost much of their appeal for college savers. The new 529 plans offered a number of tax advantages that UGMAs and UTMAs did not, including state tax breaks for contributions in many states and no federal taxes on earnings or withdrawals as long as the money in the plan was used for qualified educational expenses. UGMAs and UTMAs still exist, but people who use them today are likely to have goals other than paying for college in mind

If your primary goal is to invest for education, 529 plans offer the greatest tax advantages, control and flexibility. Custodial accounts can be good options to transfer wealth for just about anything else. If you want to make a contribution but aren’t sure if it will be used for education, the safest bet would be to put it in a custodial account. You or the beneficiary can move funds from a custodial account to a 529, but you can’t do the opposite without adverse income tax consequences

Pros:

  • No contribution limit, but gift taxes may apply for contributions over $19,000 annually ($38,000 per couple)
  • Can be funded with cash or securities
  • Anyone can contribute on behalf of the minor
  • Assets must be used for the benefit of the child, but can include non-college expenses
  • Withdrawals can be made at any time
  • Contributions not limited by the income of the account owner
  • Custodial accounts provide much more flexibility: They can be funded with any combination of cash and investments — normally, stocks, bonds, mutual funds, and so forth — although UTMAs also allow contributions of real estate, art and patents authorized by the account’s owner, or custodian, who is most commonly a parent or guardian of the minor for whom the account was set up

Cons:

  • Account is considered asset of the child (beneficiary) so it has higher weighting in financial aid eligibility formulas
    • UTMA or UGMA, is more likely to reduce your aid eligibility than money held in a parent’s name, as is the case for 529 accounts. Specifically, when the Free Application for Federal Student Aid (FAFSA) determines your Student Aid Index (SAI) — which replaced the Expected Family Contribution beginning with the 2024-25 FAFSA — it counts 20% of the student's assets but no more than 5.64% of the parents’ assets
  • With a UTMA or UGMA custodial account, parents or others who set up the account decide how to invest the assets and how distributions are used — for school expenses or anything else that benefits the child. But when kids reach the age of majority (typically 18 or 21, depending on the state), they gain control and can spend the money however they like
  • UGMAs and UTMAs have fewer tax advantages than 529 plans
    • Generally, the first $1,350 of annual unearned income is tax-free, and the next $1,350 is taxed at the child’s tax rate. Unearned income above $2,700 (the 2025 and 2026 thresholds) is taxed at the rates for the child’s parents which may be higher than the child’s rate
  • Beneficiary cannot be changed
  • Beneficiary must be under 18 or 21, depending on state
  • Vermont and South Carolina do not support UTMA accounts

References:

Merrill: What’s the difference between 529s and custodial accounts like UTMAs and UGMAs?

Merrill: Custodial Accounts (UGMA/UTMA)

Fidelity: Compare Education Savings Options

Investopedia: What Is an UTMA/UGMA 529 Plan—and Do You Want One?

Coverdell Education Savings Account (ESA)

What is it?

Coverdell Education Savings Accounts (ESAs) are tax-advantaged vehicles designed to help families save for elementary, secondary and college expenses. They operate similarly to 529 savings plans, but they have limits while also offering some additional unique benefits.

The two biggest limitations of the Coverdell ESA are: (1) that you’re only able to contribute $2,000 per year for each beneficiary, and only until they turn 18 and (2) you cannot contribute if Adjusted Gross Income is over $110,000 (for a single filer) or $220,000 (for a joint filer).

Coverdell ESAs have been around since 1998 – originally known as the Education IRA and later renamed after Senator Paul Coverdell (who sponsored the legislation that introduced them). The Economic Growth and Tax Relief Reconciliation Act of 2001 enhanced the benefits of using the Coverdell ESA, including:

  • Increasing the annual contribution limits from $500 to $2000 per beneficiary
  • Offering tax-free withdrawals for K-12 expenses
  • Allowing families who use Coverdell ESAs to claim other education tax benefits, as long as there is no “double-dipping”

These benefits were set to expire the end of 2012, which many feared would cause the Coverdell ESA to become obsolete. However, the American Taxpayer Relief Act of 2012 made the changes permanent, keeping the Coverdell ESA alive and another option to the 529 college savings plan.

You can contribute to both a 529 plan and an ESA for the same beneficiary if you wish. This was not permitted prior to 2002

Pros:

  • Distributions are federal income tax-free if used for the appropriate education expenses covered in any year to the extent that the beneficiary incurs qualified education expenses (QEE). If the beneficiary withdraws more than the amount of QEE, then the earnings portion of that excess is subject to income tax and an additional 10% penalty tax.
    • Both Coverdell ESAs and 529 plans can be used to pay for qualified higher education expenses, as defined by the Internal Revenue Service. But the rules differ regarding K-12 expenses. Tax free withdrawals from 529 plans are limited to K-12 tuition, while Coverdell ESAs can be used to pay for qualified elementary and secondary expenses
    • Each year, after a family takes the $10,000 maximum 529 plan distribution to pay for K-12 tuition, they have the option of withdrawing an additional $2,000 from the student’s Coverdell ESA to pay for other qualified expenses. (Just remember not to double-dip if you claim the American Opportunity Tax Credit or Lifetime Learning Credit)
  • Any earnings grow tax-deferred
  • Low impact on financial aid
    • Account is considered asset of the owner, not the child (beneficiary).
    • Lower weighting in financial aid eligibility formulas
  • An advantage of the Coverdell ESA over a 529 plan is the ability to self-direct investments. With a 529 plan, families are limited to investing in the investment portfolios offered by each plan
  • Similar to an IRA, with a Coverdell ESA parents will have greater flexibility when it comes to selecting investments, and will be able to choose from individual stocks, ETFs, mutual funds and even real estate
  • Account owner may transfer account to another family member (beneficiary)
  • You may take a rollover distribution from an existing ESA without triggering tax or penalty if you deposit the funds within 60 days into a different ESA for the same beneficiary or for any other qualifying member of the family. This 60-day rollover may be accomplished only once in a 12-month period
  • Can move the funds from a child’s ESA into a 529 plan tax-free to the extent that contributions are made to the 529 account for the same beneficiary in the same taxable year

Cons:

  • May only be used for education (college or K–12) expenses. Non-education uses will incur a penalty
  • Can withdraw money only for the benefit of the child
  • Beneficiary must be under 18
  • The ESA must be fully withdrawn by the time the beneficiary reaches age 30. If it is not, the remaining amount will be paid out within 30 days subject to tax on the earnings and the additional 10% penalty tax
  • Coverdell ESA phases out for parents with modified adjusted gross incomes between $190,000 and $220,000 ($95,000-$110,000 for single filers)
  • Unlike 529 plans, Coverdell ESAs are not operated or administered by the states, so there are no state tax benefits available
  • Coverdell ESA operates more like a custodial account, where the funds are the property of the beneficiary and cannot be revoked. With a 529 plan, the account owner, not the beneficiary, retains control of the assets over the life of the account
  • Funds in the account must be spent by the time the student turns 30, and at that time, any funds not withdrawn within 30 days may be subject to taxes and penalty
    • To avoid this, you can change the beneficiary on the account to another qualifying family member or roll the balance in to a 529 plan

References:

Forbes: Yes, The Coverdell ESA Still Exists – And Here’s Why You Should Care

Fidelity: Compare Education Savings Options

Saving For College: Coverdell ESAs

Roth IRA

What is it?

Roth IRAs were created to encourage people to save for retirement. A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement. Roth IRA rules dictate that as long as you’ve owned your account for 5 years and you’re age 59½ or older, you can withdraw your money when you want to and you won’t owe any federal taxes.

Unlike other retirement accounts, you can always withdraw the Roth IRA money you have contributed, any time, free of taxes and penalties.

Note the emphasis on “contributed” there. If you withdraw the investment earnings in your Roth account before age 59½, you’ll likely owe income taxes and a 10% penalty on the money you take out of the account.

There are some exceptions: If you take out Roth money to pay for qualified college costs, then you won’t owe the 10% penalty. You will, however, owe taxes on any investment earnings you withdraw (unless you’re over age 59½ and have owned the account for five years or more).

Financial aid is a bit tricky when comparing a 529 plan to a Roth IRA. Applicants include the value of a 529 plan in parental assets, if the plan is owned by a dependent student or his or her custodial parent(s), on the Free Application for Federal Student Aid (FAFSA), but not the value of a Roth IRA. Assets in a plan owned by others such as grandparents or another relative are not included on the FAFSA. Distributions from a plan owned by a dependent student or his or her custodial parent(s) are not included in income on the FAFSA. However, Roth IRA withdrawals can still count as income on the FAFSA (the account balance isn’t reported, but distributions can be). One thing changed in savers’ favor: distributions from a 529 owned by grandparents or other relatives used to count as student income and could sharply cut aid, but under the simplified FAFSA — effective the 2024-25 award year — grandparent-owned 529 distributions no longer reduce federal aid. According to savingforcollege.com, income has a greater effect on financial aid than does the amount of parental assets. To minimize any Roth impact, parents can wait to use a Roth IRA distribution to pay for college until after the student has filled out the FAFSA for the second year of college

For those parents with incomes beyond a certain level, the income may preclude them from contributing to a Roth IRA in the conventional manner. But backdoor and mega backdoor Roth options may still be available for these higher income level parents (see below). The 2021 proposals to eliminate these strategies were never enacted, so both remain legal in 2026

It can be difficult to choose between a 529 plan and a Roth IRA. But there’s nothing that says you can’t fund both, provided you’re financially able to do so. This can be a good strategy.

Pros:

  • Contributions and earnings grow tax free
    • For 2026, you can contribute $7,500, or $8,600 if you're age 50 or older (it was $7,000 / $8,000 in 2025). That means that over the course of 18 years, you could add up to about $135,000, or $270,000 if you and your spouse both contribute to an IRA
  • Contributions (but not earnings) can be withdrawn at any time—income tax and penalty free with no required minimum distributions
    • Withdrawals are not taxed as earnings until the entire principal balance is used up
  • Once you reach 59½ and it’s been at least 5 years since you first contributed to a Roth, all money can be withdrawn tax and penalty free – thus, these withdrawals can be used to help with children and grandchildren’s college expenses
    • Clearly, the real magic of the Roth IRA happens if you waited until later in life to have kids or you’re saving for grandkids
    • If you withdraw earnings from a Roth IRA before you’re 59½ (or even if you are 59½ or older but you haven’t held the account for five years including conversions), you will pay taxes at your ordinary income tax rate and you will pay a 10% early withdrawal penalty
  • Qualified education expenses are an exception to the early withdrawal penalty. If you use a Roth IRA withdrawal for qualified education expenses, you will avoid the 10% penalty, but you will still pay income tax on the earnings portion
  • Value of Roth IRA is not included on the FAFSA used for financial aid consideration (but withdrawals do impact financial aid, see Cons section for details)
  • The rest of the Roth money not used for college expenses can remain in the Roth to fund your retirement
  • Roth IRA assets, as well as other qualified retirement accounts such as traditional IRAs or 401(k)s, are not counted at all in determining the Student Aid Index (SAI) that determines how much financial aid you are eligible to receive (a higher SAI means less financial aid; the SAI — which replaced the Expected Family Contribution beginning with the 2024-25 FAFSA — is calculated using information reported on the Free Application for Federal Student Aid)
  • Roth IRA is one of the most effective estate planning tools you can use so if there are unused funds these funds can benefit your heirs
  • Roth owners also appear to have a significant advantage when needing to change the beneficiary when compared to 529 accounts

Cons:

  • Roth IRAs do have income limits that constrains who can fund Roth IRAs and by how much
    • If you’re single, your contribution limits begin to phase out at $153,000 of income for 2026 ($150,000 in 2025). If you are single and make $168,000 or above ($165,000 in 2025) you are ineligible for a Roth IRA
    • If you’re married filing jointly, your contribution limits begin to phase out at $242,000 for 2026 ($236,000 in 2025), and couples who make $252,000 or above ($246,000 in 2025) are ineligible
  • The annual contribution is low, compared to what you can contribute to a 529
  • There’s no state income tax deduction for Roth contributions
  • If you use money from a Roth to pay for college, it can affect your Student Aid Index (SAI, formerly the Expected Family Contribution) two years after you use it, since a withdrawal can show up as income on the FAFSA
    • To minimize the impact, don’t use a Roth IRA distribution to pay for college until the student has filled out the FAFSA for the second year of college
  • Giving away Roth money cuts retirement funds
    • But this consideration matters most to people who have this Roth as their primary retirement source. In this case, this also means Roth contributor may need to consider carefully whether the Roth contribution limits present an unacceptable trade-off

References:

NerdWallet: Roth IRA: What it is and How it Works

NerdWallet: 529 Plan vs. Roth IRA? The Roth Wins, Mostly

White Coat Investor: Should You Make Roth or Traditional 401(k) Contributions?

White Coat Investor: Supersavers and the Roth vs Tax-deferred 401(k) Dilemma

Morningstar Q&A: Can I Use a Roth IRA to Pay for College?

Investopedia: Roth IRA

Investopedia: Savings Plans for College: 529 Plans vs. Roth IRAs

Journal of Accountancy: Look before you leap into a 529 plan

Real Estate Investing

What is it?

Many people use real estate to help pay for their kids’ future college education. There are a few approaches:

Approach 1 — A property earmarked for college. You acquire a property specifically to fund tuition: buy it, then sell or refinance when college arrives and use the proceeds. It works best if the property cash flows or at least breaks even. A common playbook is the BRRRR strategy (buy-rehab-rent-refinance-repeat): buy right so you can force appreciation, rehab to make it “tenant-proof,” keep it rented and well-maintained (a property manager helps), then refinance or sell when needed. Done well, tenants effectively pay down the mortgage, and you can route excess cash flow into a 529 to capture both the real-estate and 529 benefits. A nice bonus: your child can learn about property, mortgages, and money by helping look after it over the years.

Approach 2 — Balance-sheet funding. If you don’t want to earmark a single property and you’re building a larger portfolio, you can simply cover tuition as an annual expense out of your portfolio’s cash flow (roughly $46k, $48k, $51k, and $53k across the four years). The key difference from Approach 1: after college is paid for, you still own the assets.

Approach 3 — Hold the property in a land trust. Some investors title the property in a land trust for privacy and simpler transfer, then use the property’s equity or sale proceeds for tuition. A land trust is an ownership and asset-protection wrapper, not a savings vehicle in itself — the underlying play is still one of the approaches above.

Pros:

  • Leverage and appreciation. A mortgage lets a modest down payment control a much larger asset; leveraged real estate has historically returned in the high-single to low-double digits through appreciation plus loan paydown.
  • Tax advantages. Depreciation, mortgage interest, and operating expenses are deductible, deferring taxes in the early years.
  • Multiple ways to tap it. Sell, cash-out refinance, take a HELOC, or just use ongoing rental income — you’re not locked into one exit.
  • You can keep the asset (Approach 2): tuition gets paid and the property keeps working for you afterward.
  • Inflation hedge. Rents and values tend to rise with — or faster than — tuition over time.
  • Teaches your kids real-world finance, work, and responsibility.

Cons:

  • Illiquidity. Unlike a 529, you can’t neatly match a sale to semester-by-semester bills; if you need cash on a deadline you may be stuck.
  • Market risk. Values can fall right when you need them — a property once projected at $800k was worth about $370k after the 2008 crash.
  • It’s part second job. Tenants, repairs, and vacancies take real time, or you pay a manager, which eats into returns.
  • Concentration. A single property is undiversified; one bad deal can derail the plan.
  • Taxes and costs on sale. Capital gains and closing costs shrink your net proceeds.
  • Financial-aid impact. Rental property value and rental income are assessable on the FAFSA, which can reduce need-based aid.
  • Skill-dependent. Success takes expertise and some luck, so most experts suggest pairing real estate with a 529 rather than replacing one.

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Family Business: Hire Your Kids & Fund a Roth IRA

What is it?

If you own a business — including a single-member LLC or sole proprietorship — you can hire your children to do legitimate, age-appropriate work (helping with marketing, filing, cleaning, simple admin) and pay them a reasonable wage. That wage is earned income, which makes your child eligible to fund a (custodial) Roth IRA. Because Roth contributions can be withdrawn at any time, tax- and penalty-free, that money is available for college — while the earnings keep compounding tax-free for their retirement. Start early enough and the numbers get remarkable: a few thousand dollars a year contributed in childhood can grow into a seven-figure retirement balance decades later.

There’s a bonus: wages paid to your kids can be a deductible business expense, and a child’s standard deduction shelters a meaningful amount of that income from federal tax. Keep it legitimate, though — the work must be real, the pay reasonable for that work, and you should document hours and tasks in case the IRS ever asks.

Pros:

  • Two goals, one account: contributions can fund college; the growth funds retirement.
  • Tax-free growth and tax-free qualified withdrawals in retirement.
  • Contributions come out any time, tax- and penalty-free — so nothing is locked up if you need it for tuition.
  • Retirement accounts aren’t reported as assets on the FAFSA, so the balance doesn’t reduce need-based aid (distributions can count as income, though).
  • Possible business deduction for the wages, with little or no tax on the child’s income up to the standard deduction.
  • Teaches work and investing early, with an enormous compounding runway.

Cons:

  • You need a real business and real work. The IRS expects legitimate duties, reasonable pay, and documentation — sham arrangements invite trouble.
  • Capped at the child’s earned income (and the annual Roth limit), so contributions are modest.
  • Payroll and paperwork. Depending on your entity you may have payroll filings; family-employment rules vary.
  • The child controls the account at the age of majority — they could spend it.
  • Withdrawing earnings early for college avoids the 10% penalty (education exception) but the earnings are still taxable — so it’s best to use only contributions for tuition and leave the earnings to grow.

References:

Max-Funded Cash Value Life Insurance

What is it?

Sometimes marketed as “infinite banking” or “be your own bank,” this strategy uses a permanent (whole) life insurance policy that is deliberately overfunded — structured with paid-up additions to maximize cash value rather than the death benefit. The cash value grows tax-deferred (with a guaranteed floor plus potential dividends from a mutual insurer), and you can borrow against it tax-free, with minimal paperwork, to pay for college — or anything else. Advocates point out that the full cash value can keep earning even while you borrow against it (“uninterrupted compounding”).

A reality check. The pitch often implies you “make money on both sides” by borrowing while still earning dividends. In practice a policy loan charges interest, so borrowing against the policy really only makes financial sense if you can deploy that cash into something that earns more than the loan costs. If you’re simply spending it (say, on tuition), you’re paying interest for liquidity you might get more cheaply elsewhere. And because commissions and insurance costs are front-loaded, cash value builds slowly in the early years — this is a long-horizon, buy-it-while-they’re-young play, not a quick college fund.

Pros:

  • Tax-deferred growth with tax-free access via policy loans.
  • Cash value typically isn’t reported on the FAFSA, so it doesn’t reduce need-based aid.
  • Flexible — funds can go to college, a first home, retirement, or emergencies, with no education-only restriction.
  • Guarantees plus a death benefit: a guaranteed cash-value floor (plus dividends with a mutual insurer) and lifelong coverage.
  • No income limits or IRS contribution caps like a Roth IRA.

Cons:

  • Expensive and slow to start. Premiums are far higher than term insurance, and fees and commissions mean little usable cash value in the first several years.
  • Opportunity cost. Over long horizons it often underperforms a 529 or low-cost index funds for the education goal.
  • Loans aren’t free. You pay interest (often around 5–8%) to borrow your own money; it only pays off if that cash out-earns the loan.
  • Loans reduce the death benefit, and a policy that lapses with a loan outstanding can trigger a surprise tax bill.
  • Complex and heavily sold. These products carry rich commissions, so be skeptical of who’s pitching it and read the illustration carefully.

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