When it comes to saving for education costs, it’s important to consider all of your options, including 529 plan alternatives.
While 529s are probably the most popular choice to save for higher education, they certainly aren’t your only choice. There are plenty of 529 plan alternatives to help you prepare for a loved one’s (or your own) education. In this post, we’re going to cover a few other paths to consider when planning for future education costs.
529 Plans – A Quick Overview:
529 plans remain one of the most common ways that people save for college, and with good reason. It is a tax advantaged account, where you can funnel money away for the future, investing it for expected education costs.
You can open a 529 savings account for pretty much anyone (even weird cousin Terry). Beneficiaries just need to have a Social Security Number or Taxpayer Identification Number. However, they’re most commonly used by parents or grandparents to save for a child’s future college expenses.
Later on, money can be withdrawn tax free from your 529 plan for qualified expenses. Things like tuition, room and board, and books qualify for tax free withdrawals. Luckily, you can use 529 plans for trade schools, community college, four year degrees, and even private K-12 tuition up to $10,000 annually. Best of all, thanks to the Secure Act 2.0, if that money isn’t used for education, you may be able to roll it into a Roth IRA. This makes this investing in 529 plans much less risky than it used to be.
P.S. If you’re still considering a 529 plan, check out our post on “How to Maximize 529 College Savings Plans!”
Best 529 Plan Alternatives:
“But this article isn’t about 529 plans!” You’re right. It’s about 529 plan alternatives! So, what other options do you have to choose from to invest for education costs? Well, it turns out- a lot!
Here are the 529 plan alternatives we’re going to detail in this post:
1. Prepaid Tuition Plans
The first alternative to 529 plans we’re going to discuss is… another kind of 529 plan?
529 prepaid tuition plans are the often forgotten brother of 529 college savings programs. Essentially, they let you prepay tuition for certain schools at current prices, locking in today’s rates (which are likely to be cheaper now than they will be in the future).
These plans can work really well if you have a child or family member who is certain that they want to go to an in-state college. However, not every state offers these plans. 529 prepaid tuition plans are only available in 9 states, and they have strict residency requirements.
It is also worth noting that the beneficiary must be younger than 15 at the time you open the account. So, if you want this plan to work for you, your child is going to need to have a pretty good idea of where they would like to get their college degree before they are even halfway through high school!
While these plans could work for some, the majority of folks will want to stick with the traditional 529 savings plan. They are more flexible, and allow you to use funds in more flexible ways.
2. Roth IRA
While a Roth IRA is intended to help you save for retirement, it could potentially be used to save for education costs too. Roth IRA contributions can be withdrawn at any time, for any reason. Some folks might find this to be a good reason to prioritize their Roth over a 529 plan.
However, it’s worth noting that withdrawals from your Roth IRA account could affect financial aid eligibility. This is because distributions from Roth accounts are recorded as untaxed income on the following year’s FAFSA.
The biggest downfall of this 529 plan alternative?… You’re basically robbing from your own retirement savings!
We really don’t recommend withdrawing contributions from your retirement accounts if you can avoid it, especially if you are an adult. The truth is, you should always prioritize your own retirement investing over college savings for your child. Failing to do so will only make things more difficult for both yourself and your child in the future. Given the opportunity to grow over decades, you’ll get more use out of that money if it remains invested in your Roth IRA.
Our take on this strategy: We strongly advise using Roth IRAs as intended, to save for retirement, not invest for education.
3. Custodial Roth IRA
Did you know that you can open a Roth IRA for your child? Each year that your child has earned income, they can contribute (up to the annual limit) to a Custodial Roth IRA. Then, when they turn legal age, they will have full control of the account.
However, because your child must have earned income, custodial Roth IRAs cater more to teenagers. If they need the money for college when they turn 18, it’s unlikely that the account will have grown significantly in just those 4 years. In fact, the portfolio could even be worth less than what you invested in the first place!
Custodial Roth IRAs are still amazing retirement accounts! The more teenagers can sock away for retirement at an early age, the more compounding that happens within their lifetime. They could potentially become Roth IRA millionaires in their 40’s if they max out their Roth every year!
4. Target Date Funds in a Brokerage Account
Target date funds can be a great way to have a diversified portfolio without much effort. They typically contain a mixture of stocks and bonds, which slowly take on a more conservative mix over time as you approach your target date. This can ensure that you won’t lose all your money should the market take an inconveniently timed dip just as your beneficiary approaches college.
However, be aware that should you go this route, you won’t enjoy any of the tax benefits that a 529 plan brings. You may also be subject to capital gains tax. But, some 529 plans, like the Vanguard 529 savings plan, will allow you to invest using target date funds within a 529 account. Then, you can score the benefits of target date funds, AND the tax advantages of a 529 plan too. Double win!
If you’re hesitant to open a 529 plan, investing in target date funds is one of the better 529 plan alternatives to consider. If your kid(s) don’t end up going to college, you can use the invested money for other purposes!
5. I bonds
If you want a super safe way to grow college funds, I bonds could be the right fit for you. They can be redeemed tax free on the federal level for eligible education expenses, and you can purchase up to $10,000 in bonds each year ($20,000 for married couples).
I bonds are designed to mimic the average inflation rate, so your savings don’t lose purchasing power over time. While purchasing I bonds is a virtually risk free way to invest for education, don’t expect significant growth or returns. This is the lowest risk (and lowest return) solution out of all the 529 plan alternatives.
6. Getting Creative with Real Estate
Lastly, you may not have to contribute money into an investment account to generate extra college savings. With a little creativity, you can save well for your child’s education outside of traditional investment vehicles.
For example, you could go the real estate investing route and start house hacking. Or purchase a rental property to generate more income. Brandon Turner, who we interviewed on the podcast a few years back, bought a 4-plex, and plans to use its cash flow to fund his daughter’s education. Pretty cool!
Working towards increasing your annual income can allow you to pay for education as you go. Or maybe, you could help your child create a lucrative side hustle. If they can get a decent amount of monthly income by the time they attend school, they can use it to pay for their tuition. It’s OK for kids to pay for their own college!!!
Another 529 Alternative: Don’t Save for College At All
A much lesser talked about 529 plan alternative is to simply to forgo saving for college altogether.
Here’s the TLDR: Scholarships exist for college. But there is no scholarship for retirement! If you don’t have the money to fund both your retirement and save for college, prioritize retirement savings. You’ll have to figure out a way to lower the cost of college later.
Speaking of, here are a few ways you can seriously cut down the cost of higher education.
- Apply for scholarships- You can usually find good scholarships to apply for by reaching out to prospective colleges and ask them if there are any opportunities you may qualify for!
- Attend an “In-State” school- going to an in-state college, as opposed to an out of state or private college can save you tons of money. Whereas a year of in-state school might cost you $10,662 for tuition and fees, a private college will cost a whopping $42,162.
- Consider Commuting- While commuting can be frustrating at times, you’ll save tens of thousands of dollars vs. staying on campus. And trust me, future you will thank you!
- Start at a community college- To save a ton of money, it could be a good idea to start out at a 2-year community college, then transfer to your dream school. This is a great way to reduce your costs, and your degree will still be from the college of your choice.
- Pursue Dual Enrollment- If you’re still in high school, take advantage of any dual enrollment classes your school may offer. You’ll earn college credits at a much lower price, and maybe even earn enough credits to graduate early!
And if you want to read even more tips, here’s our full post on ways to save money in college!
The Bottom Line:
You have a lot of options when it comes to saving for college, including to forgo it altogether. While some of these 529 plan alternatives don’t have the same tax advantages, they might offer more flexibility for your situation.
And don’t forget that there are plenty of ways to keep the cost of college down in the future. Prioritize your own retirement before saving for your kids. You’ll be in a stronger position to help them later in life.
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