While 529 plans offer tax-advantaged growth and withdrawals for qualified education expenses, they also come with restrictions that may not suit every family’s needs. There are several alternatives to 529 plans worth considering, depending on your financial goals, risk tolerance and level of flexibility. Options like custodial accounts, Roth IRAs and taxable investment accounts can offer advantages that a 529 cannot, although each comes with its own trade-offs.
A financial advisor can help you weigh the pros and cons of each option and create a savings strategy for your situation.
5 Alternatives to 529 Plans
While 529 plans are popular for education savings, they’re not the only option. Here are five alternatives that offer different benefits, rules and trade-offs.
1. Custodial Accounts (UGMA/UTMA)
Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), allow you to save and invest on behalf of a child.
These accounts have no restrictions on how the child uses the funds once they reach the age of majority, making them flexible for education expenses, a car, a wedding, or other purposes.
However, the money becomes the child’s asset at adulthood, and because it is legally theirs, it can reduce their eligibility for financial aid.
2. Roth IRA
A Roth IRA is typically a type of retirement account, but it can also be an effective education savings vehicle. You can withdraw contributions (but not earnings) at any time without tax or penalty, and you can also withdraw earnings penalty-free if they go toward qualified education expenses.
This type of retirement account offers tax-free growth and tax-free withdrawals for qualified distributions, which can be useful for education and retirement planning. If the funds are not used for education, they can remain in the account and be used later in retirement without penalty, offering long-term flexibility.
Roth IRAs have contribution limits that may restrict how much you can save each year—$8,000 in 2025 if you’re age 50 or older, and $7,000 if you’re younger. High earners may not be able to contribute directly due to income limits, though workarounds like backdoor Roth contributions may be available.
3. Coverdell Education Savings Account (ESA)
A Coverdell Education Savings Account (ESA) can be used for both K–12 and higher education expenses, providing more flexibility than a traditional 529 plan.
It also allows a wider range of investment choices, which can appeal to families seeking more control over how their education savings are invested.
You can only contribute up to $2,000 per child each year, which may not cover full education costs. You should also note that higher earners may not qualify to make contributions because of income limits.
4. Taxable Brokerage Account
A standard brokerage account lets you invest in stocks, bonds, ETFs and mutual funds with no limits on contributions, withdrawals or how the money is used. You can use the funds for education, a home purchase or other expenses, giving you full control over how and when to invest or spend.
Because these accounts don’t offer tax breaks, you’ll pay taxes on dividends, interest and capital gains. Unlike 529 plans or retirement accounts, gains aren’t tax-deferred or exempt, so planning your investments and withdrawals can help reduce your tax bill.
5. Savings Bonds (Series EE and I)
Savings bonds from the U.S. Treasury can be used to help pay for college or other qualified education expenses. If you meet income limits and use the money for approved costs like tuition, the interest earned may be tax-free.
These bonds are backed by the government, which makes them low risk. They also offer a possible tax break when used for education. This can make them a helpful tool for families who want a safe way to save.
But returns on savings bonds are usually lower than other investments. And if your income is too high, you might not qualify for the tax benefits. So it’s important to check if this option fits your situation.
Pros and Cons of 529 Savings Plan Alternatives
|
Option |
Flexibility |
Tax Benefits |
Consideration for Financial Aid |
Contribution Limits |
Investment Choices |
|
Custodial Accounts |
High |
No |
Child’s asset |
None |
Broad |
|
Roth IRA |
Medium |
Yes |
Parent’s asset |
Annual IRS limits |
Broad |
|
Coverdell ESA |
Medium |
Yes |
Parent’s asset |
$2,000/year per child |
Broad |
|
Taxable Brokerage |
High |
No |
Parent’s asset |
None |
Broad |
|
Savings Bonds |
Medium |
Yes (if qualified) |
Parent’s asset |
Purchase limits |
N/A |
Why Consider Alternatives to a 529 Plan?
529 plans can help save for education, but they have limits that don’t work for every family.
Funds must generally be used for qualified education expenses to avoid taxes and penalties, and investment options can be limited, depending on the plan. Additionally, state rules vary.
Some families want more flexibility, especially when a child does not go to college or receives a scholarship. Families who want more control over how funds are used or hope to boost financial aid and tax outcomes may find better options than a 529 plan.
When a 529 Plan Might Still Be Best
Even with other options available, there are times when a 529 plan still makes the most sense. Many states offer tax deductions or credits for contributions, which can make these plans more appealing from a savings standpoint.
When the funds are likely to be used for qualified education expenses, a 529 plan’s tax-free growth and withdrawals can provide long-term value. For families anticipating substantial education costs, the high contribution limits can also offer an advantage over alternatives such as Roth IRAs or Coverdell ESAs, which have lower annual caps.
Bottom Line
Choosing between a 529 plan and another savings option depends on your goals, income and how much flexibility you need. While 529 plans work well for many families, knowing your other choices (like custodial accounts, Roth IRAs, or taxable investments) can help you create a plan that fits your situation.
Financial Planning Tips
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A financial advisor can help you evaluate options for different goals and build a plan for your family’s future. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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If you want to build your savings up consistently, consider setting up automatic transfers from your checking to your savings accounts. This approach could help you make saving a routine part of your financial life.
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