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Saving & Investing for College

There are several different types of accounts that help you save or invest for college with tax advantages and generous contribution limits.

Types of College Saving Accounts

A regular investment account, held in a parent or grandparent’s name, that does not offer special education tax benefits.


  • No contribution limits
  • The owners control how the account is invested and used
  • No income or age limitations


  • All interest, dividends and gains are taxable
  • These accounts may impact the Expected Family Contribution (EFC) calculation made by a college for financial aid.

A tax-advantaged investment account designed to encourage saving for the higher education expenses of a designated beneficiary. It can be used for qualified K-12 public, private, and religious school expenses. Large contributions can be accepted.


  • Qualified withdrawals are exempt from federal and possibly state income taxes. See IRS Publication 970 for specific rules on the advantages of college savings programs
  • Funds can be used for all qualified education expenses, including tuition, certain room and board expenses, fees, supplies, and equipment required for enrollment at any accredited school in the U.S. or abroad
  • Typically, these have less impact on financial aid eligibility than other types of accounts
  • Large contributions are permitted, and the account owner maintains control of the assets
  • Generally, anyone can contribute, regardless of residency or income
  • It’s potentially transferable to another family member without a penalty


  • Withdrawals that aren’t used to cover qualified expenses are subject to a 10% penalty on earnings, in addition to ordinary federal and state taxes on those earnings
  • Limited investment options, an uncertain ending value, and potential losses are all real possibilities

These plans allow parents, grandparents, and others to lock in current tuition rates. Participants purchase units of tuition (years, semesters, or credits) at current costs for state colleges, then use them to pay for future college costs.


  • Anyone can contribute regardless of income
  • With most plans, proceeds may be transferred to another family member
  • Plans are guaranteed by state governments, and as such, are subject to state-specific rules


  • Most plans cover in-state tuition only
  • Generally, room and board, books, equipment, and supplies are not covered
  • There is a 10% penalty on investment earnings plus federal income taxes if funds are not used for qualified higher education expenses
  • State income taxes may be applicable
  • Limited enrollment period during each year
  • Admission to in-state schools are not guaranteed

Only a parent or legal guardian is allowed to open the account. The annual contribution limit is $2,000 per beneficiary.


  • Funds can be used for qualified elementary, secondary, or college expenses, including tuition, room and board, books, equipment, and supplies
  • Earnings are federal income tax-free when used for qualified expenses
  • Offers a variety of investment options, and the flexibility to change the student beneficiary as needed


  • You may gain or lose money depending on how it is invested
  • Gifts are irrevocable and considered assets of the beneficiary
  • No contributions are allowed once the beneficiary reaches age 18, and funds must be used by age 30
  • There is a 10% penalty on investment earning plus federal income taxes if funds are not used for qualified education expenses

This allows parents, grandparents, and others to contribute an irrevocable gift. These accounts are owned by the child but managed by parents, under your state’s Uniform Gifts (or Transfers) to Minors Act. State laws vary, so be sure to review and understand the specific rules in your state before making this type of transfer.


  • The parent controls the account until the child is an adult under the state law – generally age 18 or 21
  • Earnings and gains may be taxed at a lower rate than what the parent would pay if he or she owned the account.
  • Some distributions may not be taxed at all


  • In some circumstances, earnings and gains are taxed at the parent’s tax rate
  • Gifts are irrevocable – once it goes in the account, it is the legal property of the child
  • Ownership of the account can’t be changed, and the money can’t be used for a different child
  • Money owned by children may have a negative effect on financial aid eligibility

These accounts are intended for retirement but have the flexibility to pay for college education expenses. Roth contributions are always accessible, and earnings can be withdrawn penalty-free for qualified education expenses. Note that earnings withdrawn before 59 ½ are taxed as ordinary income. Consult your tax advisor about your specific situation.

Keep in mind

As you review ways to save for college, consider the following variables:

College expenses are a moving target: College cost increases have averaged 5% to 8% annually. If this continues, you could be paying more for college by the time your child goes than you’d pay today.

Rates of return: To keep up with inflation, you may need to look beyond the most conservative investment options in hopes of achieving higher returns.

Investment contributions: Saving is easier when you don’t have to remember to transfer funds, or make a conscious decision to save each month. Consider an automatic monthly withdrawal from your bank account so saving becomes a no-brainer.

Investment fees: Look carefully at the costs of any investment option, like fees, commissions, loads and other expenses. High investment costs can work against your goal of accumulating money for college.

Risk & rates of return: The younger your child, the more risk you can potentially take on because you have more time to endure the inevitable ups and downs of the markets.

Liquidity: You should be able to access funds when you need them, so make sure your college savings accounts won’t limit or penalize you when it’s time to pay the bills.

Taxes: If you’re saving outside of a tax-advantaged college savings account, consider how your investment earnings and growth will be taxed. If you are utilizing a tax advantaged plan, be sure you understand the tax rules, both federal and state, and seek advice if you are unsure.

Financial aid implications: It’s a frustrating truth: saving for college can decrease the amount of aid you qualify for. That’s even more true when the account is held in the name of the student instead of the parent.