Many financial advisors recommend “529” education savings plans to their clients in order to help for the future cost of higher education. Among the advantages of “529” education savings plans are tax-deterred growth and tax-free withdrawals to pay qualified expenses such as tuition, fees, books and equipment. In addition, according to the web site www.savingforcollege.com, the lifetime contribution limits (which vary by state) to “529” education savings plans are generous, ranging from $235,000 to more than $550,000. In recent years education savings plans have gotten more attractive because tax-free withdrawn funds can be used to pay tuition for kindergarten through 12th grade. Another change that came out of SECURE Act 2.0 allows leftover funds in a “529” education savings plan to be directly rolled over tax-free to a Roth IRA.
In spite of their advantages, there are individuals who are not attracted to 529 education savings plans. Tamong the individuals who are not attracted to education savings plans are parents who are not sure of their children’s higher-education plans and parents who are hesitant to tie up money they may need for other purposes.
This column presents four alternatives to “529” education savings plans for parents saving for their children’s future higher education.
Taxable Brokerage Accounts
Financial advisors say taxable brokerage accounts are a good option for saving for college. Among the advantages is the fact that there are no contribution limits to a taxable brokerage account. Another advantage is that the accumulated funds in the account do not have to be spent on college education expenses. This is especially important for parents whose children decide not to attend a college or university.
However, there are disadvantages to saving for college education expenses using a taxable brokerage account. One disadvantage is that withdrawals from the account are taxable, both federal and state. Another major disadvantage is that a taxable brokerage account is counted as an asset of the parent for the purpose of their child qualifying for federal financial aid. The impact on aid will be larger if the brokerage account is owned by the child (the student).
Roth IRAs
Roth IRAs allow contributions funds to grow and to compound tax-free if funds are not withdrawn before the Roth IRA owner becomes age 59.5. Roth IRAs are typically used as a source of tax-free income during retirement. If funds are withdrawn after the Roth IRA becomes age 59.5, they are income-tax free and are not subject to required minimum distributions that traditional IRAs are subject to.
Roth IRA contributions can be penalty-free and tax-free withdrawals at any age for any reason, including paying education expenses. Earnings can also be withdrawn, penalty- and tax-free, only if the Roth IRA account has been open for at least five years and the withdrawal is for a qualified education expense.
A disadvantage to using Roth RIAs as a way for paying education expenses is that annual contributions to Roth IRAs are capped. For example, during 2025 the annual contribution limit to a Roth IRA is $7,000 if the Roth IRA owner is younger than 50, and $8,000 if the Roth IRA owner is over 49 as of December 31, 2025.
Another disadvantage for using Roth IRAs to pay for education expenses is annual adjusted gross income limitations for contributions. For 2025, single and head of household tax filers are restricted for contributing to Roth IRAs once their adjusted gross income (AGI) is $150,000 and if their AGI exceeds $165,000 during 2025 they cannot contribute to a Roth IRA. Couples who are married and filing jointly begin “phasing out” their Roth IRA contributions starting at $236,000 of AGI. Married filing joint filers cannot contribute to Roth IRAs during 2025 once their AGI is $240,000.
UGMA or UTMA Accounts
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are types of custodial bank or brokerage accounts established for a minor beneficiary. A. An UGMA/UTMA account is designed to hold and protect assets for the beneficiary. The donor to the UGMA/UTMA (usually a parent) can appoint themself or a financial institution as the account custodian. The custodian has the authority to buy stocks, bonds, open-ended funds, closed-ended fuds and other securities on behalf of the minor.
UGMA/UTMA assets are typically used to fund a child’s education, but the donor can make withdrawals for just about any expense that benefits the beneficiary. There are no withdrawal penalties. The law allows a limited amount of earnings to be taxed at the child’s tax rate.
A significant disadvantage of UGMA/UTMA accounts is that they have one of the highest impacts on financial aid because funds count as student assets for federal financial aid purposes.
Another disadvantage is that the child gains control of the assets at the age of majority (which could be age 18 or age 21, depending on the state). Some parents may not want that, especially if the account has amassed sizable savings.
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Whole Life Insurance
Whether parents purchase a whole life insurance policy for themselves or for their child for college funding purposes, whole-life insurance can offer flexibility. Families can use the cash value in the policy for paying college-related expenses or for another purpose or leave the funds untouched in order for heirs to receive the full death benefit.
There are two ways to use accumulated cash value from a whole life insurance policy in order to pay college expenses. One way is to surrender the cash value. The other way is to borrow at a fixed interest rate up to the amount of premiums the policyowner has already paid . Surrendering may result in federal and state income tax liability on any gains in the policy. Borrowing at a fixed interest rate, up to the amount of premiums the policyowner has paid, is not taxable and does not involve establishing a fixed prepayment schedule. The deferred interest payments are simply added to the principal of the borrowed amount. Borrowers should keep in mind that they will diminish the death benefit by not paying back the loan. This could cause tax consequences if the whole life insurance policy does not remain in force.
Parents who choose to use the cash value of a whole life insurance policy are advised to aggressively fund the policy when their children are young in order for the cash value to grow sufficiently enough to pay for college when the child turns age 18. Parents should also keep in mind that whole life insurance policies offer fixed rate returns, often in the range of 1,0 percent to 3.5 percent annually, which may be lower than what parents may achieve through other investments.
Another consideration for using a whole life insurance policy to fund the cost of a college education is that while life insurance premiums are often more expensive than simply buying open-ended (mutual) funds or exchange-traded funds in a taxable brokerage account. That is because insurance premiums cover a variety of costs including: (1) Cost of the insurance (death benefit); (2) Administrative fees; (3) Mortality expenses; and (4) Fund management.
Finally, in order to use whole-life insurance, it requires a long-term commitment on behalf of the parent. A parent cannot commit to funding the whole life insurance policy and have an “off-year” in which the parent decides not to pay the premiums. In so doing the parent could end up short in cash value and the whole life insurance policy could lapse.
The following table summarizes the advantages and disadvantages of four alternatives to 529 college savings plan for funding the cost of a child’s college education expenses.
| Alternative | Advantages | Disadvantages |
|
Taxable Brokerage Account |
No contribution limits.
Funds do not have to be spent on college education expenses |
Withdrawals are federal and state taxable.
Counted as a parent’s asset for financial aid purposes. |
|
Roth IRAs |
Funds grow tax-free.
Not subject to required minimum distribution. Contributions can be withdrawn tax-free at any time. Earnings can be withdrawn tax-free if the Roth IRA has been in existence for at least 5 years and withdrawn funds are used to pay college expenses. |
Annual contributions are limited.
Annual contributions cannot be made if Roth IRA owner’s adjusted gross income (AGI) is too large. |
|
UGMA/UTMA Accounts |
Deposits can be invested in stocks, bonds, open-ended funds, and exchange-traded funds for the benefit of a beneficiary.
While withdrawals are taxable, the law allows limited earnings to be taxed at the child’s lower tax rate. |
It has a high impact on a child’s chances for financial aid because the account counts as a student asset.
When the child reaches the age of majority, (age 18 or 21 depending on the state) the account belongs to the child. |
|
Whole Life Insurance |
Cash can be used to pay the future cost of college expenses.
Borrowing from the whole life insurance policy is tax-free. |
Premiums of a whole life insurance policy are typically more expensive compared to buying open-ended funds, closed-ended funds, stocks, bonds or ETFs.
Whole life insurance policies are associated with several types of expenses that will reduce the cash value. A whole-life insurance policy could lapse if too much is borrowed and premiums paid are insufficient. Requires a long-term commitment for funding, especially in the early years of the policy, in order to build-up a sufficient amount of cash value to pay for a child’s future college expenses. |
Federal employees and retirees who are saving for their children’s or for their grandchildren’s future higher education costs are advised to discuss with a knowledgeable and licensed financial advisor whether contributing to a “529” Education Savings plan or one of the other alternatives will meet their needs and achieve their financial goals. A knowledgeable and licensed financial advisor should be able to discuss the advantage and disadvantages of a “529” Education Savings plan or any of the alternatives.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be dependable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.