College Savings Accounts and How They Work
College Savings Accounts and How They Work

5 College Savings Accounts and How They Work

It is seldom simple to save for college. College savings accounts, fortunately, may assist students and families in properly saving money for college and planning for their academic careers.

Most parents or guardians set up a college savings account to save money for their child’s education. Other college savings accounts can be created in or by the student’s name.

Each account has unique qualifying requirements and limits. For example, the Coverdell ESA retains income limitations, but the 529 plan does not. The 529 college savings plan is regarded as one of the greatest college savings accounts, but it is far from your only option.

We’ll go over the six different types of college savings accounts, how they function, and their main benefits and drawbacks.

1. Coverdell ESA

ESAs, or Coverdell education savings accounts, are tax-advantaged investment accounts that assist families in paying for eligible educational expenditures. These college savings accounts have cheaper fees and more investment possibilities than 529 plans, making them an appealing alternative for aspiring students.

Beneficiaries of Coverdell ESAs must be under the age of 18 at the time the account is established.

  • Can be used for primary, secondary, or postsecondary education.
  • Offers tax-free withdrawals when funds are spent on qualified education expenses.
  • Contributions must be used by the time the student is 30 to avoid penalties and taxes when withdrawing money.
  • Income restrictions mean the ability to contribute to a Coverdell ESA is limited by the modified adjusted gross income set for a given tax year.
  • Contributions are limited to $2,000 per child each year.

2. 529 Plan

A 529 plan, like a Roth IRA (see No. 6 below), is a tax-advantaged investment instrument.

529 programs are classified into two types: education savings plans (commonly known as college savings plans) and prepaid tuition plans. The former can be used for any educational expenditure, including books and room & board, whilst the latter can only be used for tuition and required fees.

  • Contributions can be used by the student or child at any time throughout their life.
  • No income restrictions.
  • Contributions can only be used for qualified education expenses.
  • Noneducation expenses are taxed.


Funds for minors may be kept in UGMA and UTMA custodial accounts until they reach legal adulthood. Once a recipient reaches the age of majority in their state, which can range from 18 to 21, they are granted management over their UTMA or UGMA accounts.

  • Funds can be used for more than just education expenses — if the student wanted to open a business with the money, for example, they could.
  • Anyone can make contributions to the account in the form of stocks, bonds, mutual funds, and even intellectual property.
  • Can greatly reduce the amount of need-based financial aid a student receives for college since all funds are in the student’s name.

4. Mutual Funds

Mutual funds are well managed portfolios of investments that combine the capital of numerous investors to purchase stocks, bonds, and other securities. Some believe that mutual funds are a better investment than 529 plans, which is why many people choose them for college savings accounts.

  • Money can be used for anything, not just education expenses.
  • No age requirements or restrictions.
  • Could lead to higher returns than other college savings accounts.
  • Mutual funds distribute capital gains, which is considered income and can affect the amount of need-based financial aid a student can receive.
  • Funds may have a kiddie tax.

5. Qualified U.S. Savings Bond

One kind of government-issued investment product that has a fixed interest rate for a predetermined amount of time is a savings bond. Bonds have low yields, but because the federal government backs them, they’re generally seen as safer than other types of investments.

  • Bonds are guaranteed by the U.S. government, making them a relatively safe investment.
  • Tax benefits may be available when redemption amounts are used to pay for education expenses.
  • No age restrictions.
  • The returns you’ll receive from bonds are typically smaller than those from other investments.
  • Education bonds can only be used for qualified education expenses — primarily tuition and fees — at postsecondary institutions eligible for federal student aid.
  • Room and board is not considered a qualified education expense.

DISCLAIMER: All information, content, and resources available on this website are for general informational purposes only. They do not, and are not meant to, represent professional financial advice. This website’s readers should speak with a competent advisor before making any financial decisions.


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