Many families love tax-advantaged savings plans—they let your college fund grow tax-free if used for education. Curious about your choices?
Let’s explore four great options.
Alaska 529 Plan
- Tax Benefits: Earnings grow tax-free; withdrawals for qualified expenses are tax-free. State tax deductions may be available.
- Annual Contribution Limits: No federal limit, but state aggregate limits can be high (e.g., $235k-$575k per beneficiary).
- Income Limits: No income limits.
- Flexibility of Funds: Must be used for qualified education expenses (K-12 tuition, college, trade school, student loan repayment) to avoid penalties.
Alaska 529 Plan Pros
Your savings can grow tax-free, and you won’t pay taxes on qualified withdrawals at the federal level. Many states offer additional perks, such as tax deductions or credits for your contributions. If your child doesn’t need the funds, you can even transfer them to another family member.
Alaska 529 Plan Cons
If you need to use the savings for something other than education, generally triggers income tax plus a 10% penalty on the earnings portion, while contributions (principal) remain tax-free. Also, you may find the investment choices a bit limited compared to other accounts.
Coverdell ESA
- Tax Benefits: Earnings grow tax-free; withdrawals for qualified expenses (K-12 and higher ed) are tax-free.
- Annual Contribution Limits: $2,000 total per beneficiary per year.
- Income Limits: Yes, income phase-outs apply (e.g., single filers with MAGI over $110,000 are ineligible).
- Flexibility of Funds: More investment options than a typical 529 plan; can be used for elementary/secondary school expenses.
Coverdell ESA Pros
These accounts let your savings grow tax-free, and you can use the money for a wide range of education costs—including K-12 schooling.
Coverdell Cons
You can only put in up to $2,000 per child each year, and there are some income limits to be aware of.
Roth IRA
- Tax Benefits: With a Roth IRA, contributions are made after-tax, meaning your earnings grow and can be withdrawn completely tax-free in retirement. One lesser-known perk: you can withdraw contributions at any time, for any reason, without penalty. Even fewer people know that a Roth IRA can be used to cover education expenses — for yourself or your child — or that you can open a Roth IRA in your child’s name.
- Annual Contribution Limits: $7,000 ($8,000 if age 50+) in 2025.
- Income Limits: Yes, income limits apply.
- Flexibility of Funds: High flexibility. Funds not used for college remain for retirement.
Roth IRA Pros
While Roth IRAs are mainly for retirement, you can withdraw your contributions (but not the earnings) at any time, tax-free—even for college expenses. This gives you a lot of flexibility if your needs change.
Roth IRA Cons
There are income limits and annual contribution caps to keep in mind. Also, using a Roth IRA for college could impact your retirement savings, so it’s important to weigh your options carefully.
UTMA and UGMA
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are another way to save for your child’s education. With these accounts, you can put money aside and invest it in your child’s name, helping them build a nest egg for the future.
As a custodial account, you’ll be in charge until your child reaches adulthood—usually between 18 and 25, depending on where you live. This gives you control while your child grows.
UGMA and UTMA accounts are taxed differently from ESAs and Alaska 529 plans. You contribute after-tax dollars, and the earnings are taxed at different rates. As of 2024:
- The first $1,250 in earnings is tax-free
- The next $1,250 is taxed at the child’s tax rate
- Any additional earnings are taxed at the parent’s tax rate
One thing to consider: UGMA and UTMA accounts are treated as your child’s assets when applying for financial aid, unlike Alaska 529 plans. This can reduce their eligibility by about 20% of the account’s value when filling out the FAFSA. It’s good to keep this in mind as you plan.