What other education savings accounts exist
A 529 plan is one way to save for education, but it is not the only tax-advantaged account available. If a 529 does not fit your situation — because of contribution limits, investment options, or the way withdrawals work — you have alternatives that may work better. The most common are Coverdell Education Savings Accounts (ESAs), Uniform Transfers to Minors Act (UTMA) accounts, and regular custodial brokerage accounts. Each has different rules about how much you can put in, what you can spend the money on, and what happens to unused funds.
You can also use money from a regular savings account, a Roth IRA (under specific circumstances), or a 401(k) loan to pay education costs. Some of these options overlap with 529s, and some work better for particular situations — like saving for private K-12 school, paying for room and board, or covering costs at trade schools and apprenticeships.
Key Takeaways
- Coverdell ESAs let you save up to $2,000 per year per child and offer more investment control than most 529 plans, but have income limits that phase out for higher earners.
- UTMA accounts have no contribution limits and no restrictions on what you spend the money on once the child reaches age of majority, but the money counts against financial aid more heavily than 529 funds.
- Roth IRAs can be used for education expenses without the 10% early withdrawal penalty, though you still owe income tax on earnings, and this reduces retirement savings.
- Regular custodial brokerage accounts offer complete flexibility but provide no tax advantages and count fully against financial aid may be able to access.
- Some states allow 529 funds to be used for K-12 tuition and student loan repayment, which may overlap with what other accounts can do.
Coverdell Education Savings Accounts (ESAs)
A Coverdell ESA is a tax-free savings account specifically for education expenses. You can contribute up to $2,000 per year per child, and the money grows tax-free as long as it is used for may have access to education costs. Unlike a 529, you control the investments directly — you choose individual stocks, bonds, mutual funds, or other securities, rather than picking from a plan's preset investment menus.
The catch is income limits. If you file as single and earn more than $110,000, your contribution limit begins to phase out. If you earn more than $125,000, you cannot contribute at all. For married couples filing jointly, the phase-out starts at $220,000 and ends at $250,000. These limits are set by the IRS and do not change year to year unless Congress acts.
Money left in a Coverdell at the end of the year the beneficiary turns 30 must be withdrawn. If it is not used for education, you owe income tax on the earnings plus a 10% penalty — the same as a 529. You can roll unused funds to another family member's Coverdell, but only if they are under 30.
UTMA and UGMA custodial accounts
A Uniform Transfers to Minors Act (UTMA) account or Uniform Gifts to Minors Act (UGMA) account is a straightforward way to hold money or investments for a child. You can contribute as much as you want, and there are no restrictions on what you spend the money on — it does not have to be education. The account is in the child's name, but you control it until they reach the age of majority (usually 18 or 21, depending on your state).
The tax treatment is straightforward: the first $1,250 of earnings per year (as of 2024) is tax-free, the next $1,250 is taxed at the child's rate, and anything above that is taxed at the parent's rate. Once the child reaches age of majority, the account is theirs to use however they want — you have no say.
The downside for education savings is that UTMA accounts count heavily against financial aid. The money is considered the child's asset, so it reduces aid may be able to access more than a parent-owned 529 would. If you are planning to file the Free process for Federal Student Aid (FAFSA), a UTMA account will hurt your aid package more than other savings vehicles.
Roth IRA withdrawals for education
A Roth IRA is a retirement account, but you can withdraw contributions (not earnings) at any time for any reason without penalty or tax. If you have a Roth and want to use it for education, you can pull out the money you put in. This is useful if you are saving for both retirement and education and want flexibility.
The rule is specific: you can withdraw your contributions tax-free and penalty-free. Earnings can be withdrawn for may have access to education expenses without the 10% early withdrawal penalty, but you still owe income tax on the earnings. This makes it less efficient than a 529 or Coverdell, where earnings come out tax-free if used for education.
Using a Roth for education also means less money available for retirement. If you are young and have decades until retirement, this trade-off may be acceptable. If you are closer to retirement age, it usually makes more sense to keep the Roth intact and use a dedicated education savings account instead.
Regular custodial brokerage accounts
A custodial brokerage account is straightforward an investment account held in a child's name, with a parent as custodian. You can open one at any brokerage and invest in stocks, bonds, mutual funds, or exchange-traded funds. There are no contribution limits, no income limits, and no restrictions on what you spend the money on.
The trade-off is that you get no tax advantage. Dividends and capital gains are taxed each year, and you owe tax on earnings even if you do not withdraw the money. For a child under 18, the first $1,250 of unearned income is tax-free, and the next $1,250 is taxed at the child's rate — the same as a UTMA. Above that, it is taxed at the parent's rate.
Like a UTMA, a custodial brokerage account counts as the child's asset for financial aid purposes, which reduces aid may be able to access. Use this account only if you do not expect to file the FAFSA or if you are saving for a child who will not attend a school that uses FAFSA.
Comparing contribution limits and investment control
| Account Type | Annual Contribution Limit | Investment Control | Income Limits |
|---|---|---|---|
| 529 Plan | No annual limit; aggregate limit varies by state ($235,000–$550,000) | Limited to plan's investment options | None |
| Coverdell ESA | $2,000 per year per child | Full control; any investment allowed | Yes; phases out at $110,000–$125,000 (single) |
| UTMA/UGMA | No annual limit | Full control; any investment allowed | None |
| Custodial Brokerage | No annual limit | Full control; any investment allowed | None |
| Roth IRA | $7,000 per year (2024); child must have earned income | Full control; any investment allowed | None for contributions |
How these accounts affect financial aid
If you plan to file the FAFSA, the account you choose matters. A 529 plan owned by a parent counts as a parental asset and reduces aid by up to 5.64% of the account balance. A 529 owned by the student counts as a student asset and reduces aid by up to 20% of the balance. A UTMA, UGMA, or custodial brokerage account is always considered a student asset and reduces aid by 20%.
A Coverdell ESA is treated like a 529 — it counts as a parental asset if the parent owns it. A Roth IRA is not counted as an asset for FAFSA purposes at all, which makes it attractive if you are concerned about aid. However, the tax advantages of a Roth are smaller for education than for retirement, so this benefit comes with a cost.
If you do not plan to file the FAFSA — because your child will attend a school that does not use it, or because you do not expect to may have access to for aid — the financial aid impact does not matter, and you can choose based on tax advantages and flexibility alone.
When to use each account
Use a 529 if: You want to save a large amount, you do not mind limited investment options, and you want the simplest tax treatment. 529s also allow you to use funds for K-12 tuition in most states and for student loan repayment (up to $35,000 lifetime per beneficiary).
Use a Coverdell ESA if: You want full investment control, you earn below the income limits, and you are saving a smaller amount (under $2,000 per year). Coverdells also allow K-12 tuition and some other education expenses that 529s may not cover.
Use a UTMA or custodial brokerage if: You want complete flexibility on how the money is spent, you do not plan to file the FAFSA, or you want the child to have full control of the money once they reach age of majority.
Use a Roth IRA if: You are saving for both retirement and education, you want the money to be invisible to financial aid, and you have earned income to contribute. This works best for older teens who have jobs.
Frequently Asked Questions
Can I have both a 529 and a Coverdell for the same child?
Yes. You can contribute to both in the same year, as long as your total contributions to the Coverdell do not exceed $2,000. The money in each account is separate, and both grow tax-free if used for education. This can be useful if you want the investment control of a Coverdell and the higher contribution room of a 529.
What happens to a Coverdell if my child gets a scholarship?
You can withdraw an amount equal to the scholarship tax-free, but you still owe tax on the earnings portion of that withdrawal. A 529 has the same rule. If the scholarship covers all education costs, you can roll the remaining Coverdell balance to a sibling's account if they are under 30.
Does a UTMA account have to be used for education?
No. A UTMA can be used for anything once the child reaches age of majority. You can suggest education, but you cannot force it. If education is your only goal, a 529 or Coverdell gives you more control because the money can only be used for education (or withdrawn with tax and penalty).
Can I withdraw from a Roth IRA to pay for my child's college without penalty?
You can withdraw your contributions without penalty at any time. Earnings can be withdrawn for education without the 10% early withdrawal penalty, but you owe income tax on the earnings. This is less efficient than a 529 or Coverdell, where education withdrawals are completely tax-free.
What if I save in a regular savings account instead of these accounts?
You get no tax advantage — interest is taxed as ordinary income each year. The money counts as a student asset for financial aid if you file the FAFSA. A savings account makes sense only if you are saving a small amount, you do not expect to file the FAFSA, or you want the money to be completely flexible and available for non-education expenses.