Which of these 3 College Savings Plans is Right for You?

A college graduate stands next to mother and grandfather

As college costs continue to rise, saving for college is more important than ever. Without college savings, many students end up taking a significant amount of loans to complete their education, which often results in a large amount of interest as well as a higher risk of default. To get your student’s college savings on the right path, you will first have to identify which college savings plan will work best for you and your student.

529 Plans

Named for after the IRS section which began these types of plans, a 529 is a state offered plan created to help save for future educational expenses. You can choose a savings plan in your state or a different one, although the latter may not give you the same tax breaks.

These plans work in a similar manner as 401K and IRAs where you will contribute money to put into investment options of your choosing such as mutual funds or similar investment choices. The value of your plan will adjust in tandem with the performance of the investments the money is in. As the investor, you will be able to choose the investments and change them as time goes on if necessary.


  • You can take state tax deductions – Some states will offer state tax deductions, allowing the money to grow tax-free. As long as the money is utilized for educational expenses, you will be able to withdraw it without paying income tax.
  • There is no penalty for paid school – If educational expenses are covered by GI bills, scholarships, or your student enrolls in a military academy, you will be able to withdraw the money without tax penalty as well.
  • You can change the beneficiary – If the full amount is not used, the beneficiary of the plan may be changed.


  • You may end up paying tax on the entire amount – One of the primary cons of a 529 plan is that if not used for educational purposes or one of the paid school exceptions mentioned earlier, you will be responsible for paying tax on the amount invested as well as the interest that it has accrued.
  • You will have limited investing options – Investing in a 529 plan may limit your investment options. If you find other investments that are performing better, you will be unable to move the money out of the plan to another investment without paying a 10% withdrawal penalty.
  • It may affect your student’s financial aid – While 529 plans do not often affect the student’s personal financial aid eligibility, it will be calculated in the family contribution portion which could reduce the overall value if the student is a dependent.

ESA – Educational Savings Account

An educational savings account is a savings program for students from kindergarten through twelfth grade. These funds can be used towards college education as well as some secondary school expenses. These accounts offer tax advantages as well as aid in savings. Depending on the plan guidelines the funds may transfer over to the beneficiary once they are no longer a minor.


  • You get a break on federal tax – A pro of an ESA account is that you will not pay federal income tax on the contributions or the withdrawals as long as they are used for educational expenses.
  • You have a wider range of investment options – These accounts typically offer a broad range of investment options,
  • Can be used for secondary education expenses – The funds can be utilized for some secondary educational expenses your student may incur.


  • There are no state tax exemptions – While there is tax relief at the federal level, there are no state tax benefits to this type of account.
  • There is a cap on the amount you can invest – There is an annual limit of $2000 per beneficiary which may be reduced if your modified gross income becomes too high.
  • Contributions can only be made until age 18 – The money can only be invested until the student reaches the age of 18 and the funds will need to be used by the time the beneficiary has reached the age of 30.
  • It will affect federal financial aid – Federal financial aid will take the amount of the account into consideration when financial need is determined and can reduce the amount offered.

Roth IRAs

A Roth IRA is an investment retirement account where the money you put in is taxed when you contribute, but not upon withdrawal. If you have been saving to an IRA, you can remove money from it for qualified college expenses penalty free even if it is too early to withdraw.


  • It doesn’t have to be used for education expenses – One of the pros of a Roth IRA is that it is a retirement savings account and does not have to be used for only educational expenses.
  • There is no penalty for withdrawing for educational expenses – While you will pay income tax on your contributions, you will be able to withdraw earlier than retirement age without penalty for any education costs.
  • You have many more investment choices – When choosing investment options, you will have a broader range of options to choose from.


  • You will have to pay taxes on contributions – The main con of using a Roth IRA for school expenses is that you will have to pay both federal and state income tax on the money contributed.
  • The withdrawal amount will be reported as income – Whatever money you withdraw from the IRA for college will have to be reported on the student’s income, which can reduce the financial aid amount they can receive.

If you would like to set up college savings account, or would like more information on your options, contact the professionals at BP Financial today.

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