Top College Savings Accounts for Parents: 529 Plans, Roth IRAs & More

School is back in session! The new college year has officially begun, and with it comes a deep dive into a very important topic: college savings. Students know that this is a big deal, and parents definitely understand how significant it is for the next four years of a child's life (or less, if you’re a student in their second or third year). We also know that parents and students may not immediately realize that certain savings accounts could work better for others, depending on who you are or what financial situation you find yourself in. It’s never too early to start planning for college! Whether your kiddo is 18 months or 18 years old, this one should be helpful!

In this blog, we will break down several different types of savings accounts that you might want to consider if you have a kid who plans to go to college someday!

What Does a College Savings Account Mean for You?

For parents or students, depending on who pays for it, college savings accounts are meant to help you with the cost of education expenses like tuition, dorm, class materials, and any other fees that come with being in school. It allows parents and students to maintain a good standard of flexibility when tracking their spending, especially if education plans change, a payment is made incorrectly, or a school transfer occurs, as examples of its importance. Saving ANYTHING before your kid starts college can be helpful.

Savings accounts like Coverdell ESA, Roth IRA, the 529 Plan, custodial account or any your standard traditional savings account can help you with getting started and that is what’s so great about the help they can do for you, they don’t just help you get get a foot in the door, they also make sure to be there for you when that door needs to be opened on the way out when you eventually finish your college education.

The 529 Plan 

Have you heard of the 529 Plan? If not, that’s ok! 529s are a savings plan that has started to grow in popularity over the last few years, and we want to make sure you know about it, given how many people it’s starting to help.

The 529 Plan is a tax-advantaged savings plan designed to motivate individuals to save for future educational expenses. Tax-advantaged just means that the plan comes with tax benefits. That’s one of the biggest benefits it’s known for, which other savings accounts might not offer.

One of the biggest scares that a kid can have coming out of college, going into the next big step of their life, is not wanting to have too much or any debt at all piled on that they have to repay. The 529 plan helps with making sure that that’s not a concern, at least not to a degree where you have to worry constantly. Thanks to what’s called The SECURE Act, students who are 529 account owners are able to cover up to $10,000 in student loans.

If you’re a parent reading this, we can’t recommend enough that you read more into a 529 because it can be really helpful down the line!

Roth IRA

A Roth IRA is a type of savings account that allows you to make tax-free withdrawals of money for when you plan to retire from working. You’re probably asking, “How does this help me with saving up for college?”, and the answer comes from the fact that it’s a two-fold process. It’s flexible for both retirement and educational costs and is not counted as an asset on a FAFSA form (the free way to sign up for financial aid).

We just mentioned the 529 plan, and having both that and a Roth IRA as a young student is perfect cause it gives them a head start. Your tuition, other fees like books, class supplies, and even what you do with your dorm room if you don’t commute, can be included within that.

Most importantly, it may have less of an impact on your child's financial aid offer, and this makes it a great choice for you.

The Coverdell Education Savings Accounts (Coverdell ESA)

Like the 529 Plan, the Coverdell ESA is a trust or custodial account that is tax-advantaged and is solely used to pay for qualified education expenses for the designated beneficiary of the account.

Unlike the 529 Plan, there are a few differences with regard to contribution limits and investment options. Essentially, that is the main key difference; it does offer more flexible options. Both are tax-free on withdrawals, where ESA covers you from kindergarten through college, and the 529 is up to $10,000 for primary or secondary school tuition (depending on the state you live in). 

The annual maximum contribution that can be made is $2,000 per beneficiary, which makes that a potential negative on the part of education savings. Depending on how much you earn in income, the ESA will also limit who can contribute to it. 

From an education expenses perspective, what makes these two savings accounts good is not that they have something to them that makes them a bad option, but more so that they have different aspects that work for certain people. That’s why reading up on both and taking in as much information as possible before finalizing your decision is vital.

A Custodial Account

A custodial account is the type of savings account that would be solely managed by an adult and set aside money for college expenses that, say, an ESA or 529 Plan won’t include.

While a custodial account does not have the same tax advantages as a 529 plan does, the intent of using an account like this comes from the care that a parent has for their kid that by the time they come of age, all that money built up will be in their hands now as they are ready to start college. 

Do Any of These Work for International Students?

New York State, with colleges like The University of Buffalo as an example, is filled with many international students, more than most other colleges and states in the country. We understand that for those students, this might be a topic of conversation that doesn’t fully apply to them, and we want to address that.

International students are able to open a Roth IRA as long as they earn U.S.-based income to contribute to it. U.S. tax residency requirements, unfortunately, might prevent them from opening an ESA; however, due to the account's benefit of having a beneficiary policy, the account can be opened by a U.S. citizen or resident for that student. This very same thing applies to the 529 plan as well with regard to the beneficiary policy. Finally, international students cannot open a custodial account as it is strictly permitted only to U.S.-based residents.

For all the students ready to start or continue their journey into college, along with the parents who are ready to support them, we understand this means a great deal to you. With all the information and resources we've provided, the next best thing you can do is reach out to us with any questions, and we look forward to helping you!