The Ultimate Guide to Education Savings Options: 529 Plans and Beyond

Those that choose to invest in the education of a family member, friend or acquaintance are investing not only in that individual’s future, but also the future of society. It is an act of generosity, forward-thinking, and love. However, this type of investment can be more complicated than initially thought. Which plan should you choose and how do you decide? Here are some key details about 529 plans and other education savings options to help you decide which plan is appropriate for you and your loved ones.  
 

529 Plan 

People invest in a 529 plan for several reasons. Many states offer tax benefits that will continue as the balance of the account grows and the funds are distributed toward education expenses. There are two kinds of 529 plans: 

1. College Savings Plan (The college savings plan is the more popular of the two) 

2. Prepaid Tuition Plan 

There are several advantages to having a 529 plan: 

• Investment opportunity: State-run 529 plans allow you to invest in mutual funds and your earnings can grow tax-deferred. 

• Tax-free growth: Contributions to this plan grow tax-free and then when you distribute the funds, they are tax-free as long as it is toward an eligible educational expense. 

• Tax deductions: Depending on what state you live in, you may be afforded a tax deduction or credit for your contributions. 

• Contribution limits: 

• No income limits for contributors. Limits allow for “superfunding” contributions ($90,000 in one year per individual, or $180,000 for married couples), without triggering federal gift taxes. 

• There is an increased $20,000 annual K-12 withdrawal limit allowing for more money to be saved. 

• Rollovers: Potential for long-term, tax-advantaged rollovers to Roth IRAs of unused funds to a beneficiary’s Roth IRA (subject to lifetime caps and plan requirements). 

There are a few disadvantages that you should be aware of: 

• Non-qualified penalty: Withdrawals not used for qualified education expenses are subject to income tax plus a 10% penalty on the earnings. 

• Beneficiary limit: Plans have a limit of only one beneficiary at a time, so if you have multiple children whose education you want to help fund, you may need multiple plans. 

• Tax deduction: There is no federal tax deduction or credit for your contributions. 

• Tax recapture: If you roll over funds to a different state’s plan, you may be subject to recapture of previously claimed state tax deductions.ⁱ 

Uniform Transfers to Minors (UTMA) and Uniform Gifts to Minors (UGMA) 

UTMA and UGMA are custodial accounts that allow an individual to contribute or transfer funds to a minor without having to establish a trust. Both accounts are created under the name of the child but managed by a parent or guardian until the minor reaches the age where the assets can be passed to them (the age varies with state). 

UTMA and UGMA contributions are made with after-tax dollars and follow the gifting rules of up to $19,000 annually (for 2026) without being subject to a gift tax ($38,000 for married couples). The first $1,350 earnings from any of the accounts may be tax-free. The next $1,350 of any earnings in excess of the exempt portion may be taxed at the child’s tax rate. Anything thereafter is taxed at the parent’s tax rate.ⁱⁱ 

UTMAs 

Pros of UTMA Accounts 

• No contribution limits: There is no cap on what can be gifted though larger amounts may trigger a tax consequence. 

• Easy setup: These accounts are easy to open through a house. 

• Flexibility: Funds are easy to transfer into them and can be used for anything benefitting the minor (educations, car loan, business opportunity, the mortgage on a house, etc.) 

• Initial lower tax rates: Some earnings are taxed at the child’s lower rate. 

• Investment options: These accounts can hold stocks, bonds, real estate, art, and other property, and not just financial assets. 

Cons of UTMA Accounts 

• No tax-deferred growth: Unlike 529 plans, earnings are taxed annually. 

• Kiddie tax: Unearned income above a certain amount ($2,700) is taxed at the parent’s higher rate. 

• Contributions are permanent: Contributions cannot be taken back. 

• Effect on financial aid: Potentially reduced eligibility for aid more than a 529 plan. 

• Child gets control of the account: The child gains full control of assets 
   

UGMAs 

Pros of a UGMA 

• No contribution limits: There are no annual caps, though larger gifts cold trigger a gift tax consequence. 

• Flexibility: Similar to an UTMA, funds can be used for anything benefiting the child. 

• Investment options: Can hold stocks, bonds, mutual funds, and other financial assets. 

• Gift tax benefits: Gifts up to the annual exclusion amount are free from gift tax. 
   

Cons of a UGMA 

• Contributions are permanent: Once money is contributed, it cannot be taken back nor can the beneficiary be changed. 

• Tax disadvantages: Earnings are taxed annually. Income over a certain threshold is taxed at the parent’s higher rate. 

• Child gains control: Once the child reaches age 18 or 21, depending on what state you live in, control is transferred to them. 

• Minimal financial assets: Cannot hold real estate or other tangible assets like UTMAs can. 

• Impact on financial aid: The account is considered the child’s asset, reducing eligibility for need-based aid. 
   

Roth IRA 

Traditionally Roth IRA accounts are used as retirement savings instruments, but they can also be used for educational purposes. No tax deduction occurs initially, so your account can experience tax-deferred growth. 

Advantages of a Roth IRA include: 

• Contributions: You can save $7,500 annually ($8,600 for those 50 or older) annually, in your Roth IRA that can be put toward educational expenses. 

• Roth IRA for a minor: You can set a up Roth IRA for a minor that you can contribute to and when your child turns 18 or 21, age depending on the state where you live, control of the Roth is transferred to your adult child. 

• Teen contributions: If your teen has earned income, a Roth IRA can be opened for them, providing a long-term tax-free growth vehicle that can later be used for education. 

• Qualified expenses: Withdrawals for education can cover tuition, books, supplies, equipment, and other fees at eligible institutions. 

• Flexibility: Contrary to 529 plans, you can withdraw original contributions at any time, for any reason, without taxes or penalties because taxes have already been paid. 

• Tax advantage Earnings used for qualified higher education expenses are generally penalty-free as long as the account is more than 5 years old.ⁱⁱⁱ  

Disadvantages of a Roth IRA for educational purposes include: 

• Contribution limits: You are limited to $7,500 in 2026 ($8,600 if you are 50 or older). So, unless you start early, it could take time to build up enough money to pay for school, however, maxing out contributions annually can significantly help with expenses. 

• Penalties: You cannot withdraw any earnings earlier than the eligibility requirements (5 years), or you will have to pay taxes and a 10% penalty. 

• Earnings withdrawals will be taxed except for the following circumstances: 

• The account has been open for at least five years 

• Account owner is age 59 ½ or older 

• Death of the account owner 

• Disability 

• First-time homeowner 

• Eliminate the compounding: Spending retirement money is not the most beneficial course of action, because once it is taken out it is no longer compounding and compounding takes many decades to work. 
   

Permanent Life Insurance 

For some individuals, permanent life insurance might be a suitable option due to the tax-deferred savings structure. 

Key factors and trends regarding life insurance and education for 2026 include: 

• Loan benefit: When your child is preparing to enroll in college, you can take a loan out against the cash balance. 

• Cash value tax-deferred growth: Every dollar put toward premiums goes to both the death benefit and a separate cash-value account. The money in the cash-value account will grow tax-deferred, with the potential to generate a three percent to six percent return. 

• Flexibility: Unlike a 529 plan, life insurance can offer more flexibility. If your child decides not to attend college, you won’t experience the tax burden and penalties of a 529 plan.^iv 

• Financial aid calculations: Life insurance is generally not included as an asset in financial aid calculations for FAFSA.^v 

Several disadvantages of permanent life insurance include:  

• Fees: The costly upfront and recurring fees. 

• Time: It takes a long time for your money to grow enough to exceed the amount paid in premiums, so if you are considering using this method, you have to start when the children are very young. 

• Slow cash accumulation: It can take 10 years or more for the policy’s cash value to exceed the total premiums paid. 

• Reduction of death benefit: Loans and withdrawals lower the policy’s death benefit. 

• Potential lower returns: Compared to market-based investments in a 529 plan, cash value growth in a permanent insurance is often limited. 

• Qualification requirements: You must pass a medical underwriting to purchase a policy which is different than a 529 plan.^vi 
   

Coverdell Education Savings Account (ESA) 

An ESA is a tax-deferred account that helps families fund educational expenses. 

There are several advantages to an ESA account: 

• Beneficiary age rule: Beneficiaries are required to be under the age of 18 at the creation of the account. However, the age restriction may be waived for special needs beneficiaries. 

• Contribution limit: The contribution limit is $2,000 per beneficiary annually, though multiple accounts may be set up for a single beneficiary.^vii 

• Usage of funds: ESA funds have to be used or rolled over to a family member’s account by the time the beneficiary reaches 30-years old, although the funds may also be used to cover qualified educational expenses for kids between grades K-12^viii. ESA funds can be used to cover tuition and other qualifying expenses like books, fees, supplies, room and board. ^ix 

• Deadline: Contributions for the 2026 tax year must be made by April 15, 2027 (or the tax filing deadline).  

Disadvantages of an ESA, include: 

• Income restrictions: Contributors must earn less than $110,000 and joint filers less than $220,000 per year. 

• Tax rules: Contributions are not tax-deductible. 

• Age restriction: No contributions are allowed once the child turns 18 (as mentioned earlier). 

• Usage of funds: If funds are not used for education, a portion of the earnings could be taxable to the beneficiary and potentially subject to a penalty.^x 
   

Consider Consulting a Financial Professional 

If investing in the future of a loved one is something you want to explore, consider consulting a financial professional to help you work through your options and determine which is appropriate for you and your financial goals. 

Important Disclosures: 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. 

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. 

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings. Please consult with your tax advisor before investing. 

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. 

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. 

This article is prepared LPL Marketing Solutions. 

LPL Tracking #1064214