The Best College Savings Alternatives to 529 Plans

September 8, 2021
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The past few articles have been focused on the pros and cons of 529 plans as a popular method for college savings. They are a great conservative long-term savings plan when they fit in well with your overall financial plan. However, as we have discussed, they aren’t the best option for every family. Before you default to a 529 plan, you will want to consider other college savings alternatives.

Here are some of the best options, according to the financial planning specialists at Illumination Wealth:


You can use a retirement account to fund college expenses for your children, while saving for your retirement at the same time. Using a Roth IRA might allow you to save up and earn a potentially higher amount of money compared to a 529 plan. You are eligible to withdraw any Roth IRA funds without penalty after the age of 59 1/2. However, paying for college expenses (for you, a spouse, your children or grandchildren) is also a qualifying reason to withdraw Roth IRA investment earnings early without penalty.

One huge advantage of an IRA is that you will still have those funds available for retirement if your child decides not to go to college. One drawback is that these accounts have contribution limits of $6,000 a year until the age of 50 ($7,000 after the age of 50). Ultimately, Roth IRAs and other IRAs are meant for retirement savings, but may provide enough flexibility for college savings if you don’t want all your money tied up in a 529 plan.

Brokerage Account

You can set up a brokerage account for your college savings plan. On the plus side, there are no contribution limits, early withdrawal penalties or restrictions on how you can use the funds. In addition, you will have more control over your money and your investment strategy. It allows you to be more aggressive when the timing is right and more conservative as needed, which could potentially earn you a lot more money over time—compared to 529 plans which are generally very conservative. You can spend the money on college expenses, retirement or anything that you and your family need when the time comes. On the negative side, a brokerage account will not give you any tax breaks with contributions or withdrawals.

Investment Property

You can utilize the appreciation investment property holdings to finance college expenses. Real estate is almost always one of the most dependable investments. Purchasing investment property and letting it appreciate as your children grow can be a great way to earn the money. You can sell the property when the time comes and use the profits (minus any selling costs or taxes on the appreciation) to pay for college costs. You might be able to get a cash-out refinance that allows you to keep the property while cashing out some or all of the equity. If the property is being used to generate additional income (as a short-term or long-term rental unit), you can also benefit from the added cash flow. Some of those monthly earnings can even be invested in one or more of these other solutions to grow the funds even more.

Education Tax Credits

The United States currently offers two important tax credits for students and families with qualified education expenses. You may be able to take advantage of the American opportunity tax credit (AOTC), which grants a credit of 100% of the first $2,000 spent on tuition, fees and course materials. In addition, the AOTC allows for 25% of the next $2,000 per student for up to four years. A portion of the AOTC is also refundable as part of your tax return.

The other tax credit to know about is the lifetime learning credit (LLC), which allows for a deduction of 20% for up to $10,000 of college expenses. This credit, however, is not refundable. You cannot use both of these credits simultaneously and they aren’t for college savings. They are credits you can apply when actually paying for college expenses from your savings.

Savings Accounts

Speaking of savings, this may be a fine enough method for some families who aren’t interested in 529 plans and want to avoid the complications of other investment accounts. Just continue to put as much money as you can in a savings account. Look for accounts with higher interest yields or consider a certificate of deposit (CD) as another alternative. These are very conservative methods for college savings, but may suffice if you manage your money well enough. Plus, you’ll have much, much easier access to the money when you need it—whether for college or other family expenses. Then, you can later use the funds and take advantage of either tax credit listed above.

Other than the slow-growth potential of this approach, another downside of traditional savings is that you have to be very disciplined if trying to put that money away for your kids’ college savings. Having the money too available can be a problem for some people!

Custodial Accounts

If you aren’t sure if your children are going to college or not, you can look into establishing a custodial account. The Uniform Gift to Minors (UGMA) and the Uniform Transfer to Minors Act (UTMA) are two of the most popular options. They both offer tax breaks for individuals under the age of 18 and there are no restrictions how the funds are ultimately used, as long as they benefit the child. It is important to note that you won’t have control over how your child uses the money when they become of majority age. They may want to spend it on something other than education.

Coverdell Education Savings Accounts (ESAs)

An ESA is very similar to a 529 plan. It allows you to set up a tax-advantaged college savings account. The funds are ultimately available for qualified educational expenses. However, these plans are designed for lower-income households. You can only contribute up to $2,000 per year and you cannot have an adjusted gross income of more than $110,000 (or $220,000 for a joint-filed tax return).


Before you set up a 529 plan or explore any of these alternatives, it’s a smart idea to talk to an experienced financial advisor who can help you refine your financial plan. You’ll want to look at your personal retirement savings goals, college savings, cash flow for living expenses and so many other factors. This is how you develop a long-term plan that will give you greater financial independence as the years go by.

To get started, contact Illumination Wealth today. Let us help you figure out a better financial plan.