Parents looking at future college expenses are already prioritizing the need to save as they seek to reduce the debt burden for their children and perhaps themselves.
Many families choose a savings plan based on tax treatment, ease of distribution, and impact on federal financial aid and other programs. In some cases it may make sense for families to use a mix of different savings options, including 529 college savings plans, UGMA/UTMA custodial accounts, and Roth IRAs.
For example, while using a 529 plan for most of the savings dedicated to college expenses, it may make sense to hold a small portion of funds in a custodial account that may be used toward certain expenses (e.g. transportation), which are not currently considered qualified education expenses.
The following table illustrates the differences between these savings accounts.
College savings options
*Federal tax-free distributions (taken after December 31, 2017). Earnings may be subject to state income taxes in certain states.
†Other types of financial aid calculations may differ from FAFSA.
‡Withdrawn earnings subject to federal tax and 10% penalty if not used for qualified expenses. A 529 plan can also be used to pay off student loans (up to $10,000 total).
§Roth distributions are free from taxes and penalty if the account is held for 5 years and there has been a qualifying event such as the account owner turning age 59½.
Learn more about 529 college savings options provided by Putnam Investments.
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