Introduction

Saving for college without relying on a 529 plan is a practical choice for many families. Alternatives can offer greater flexibility in how funds are used, different tax tradeoffs, and sometimes better estate- or financial-aid outcomes depending on your goals. In my 15 years as a financial planner, I’ve used combinations of these accounts to match family priorities—lower short-term risk, long-term growth, or portability if a child doesn’t attend college.

How the main alternatives work (quick overview)

  • Custodial accounts (UGMA/UTMA): A parent or guardian holds assets for a minor. Investments grow for the child and become the child’s property when they reach the state-defined age of majority. These accounts allow almost any type of investment and have no restriction on how the money is used once the child gains control.
  • Coverdell Education Savings Accounts (ESAs): Tax-deferred growth and tax-free withdrawals for qualifying education expenses (K–12 and higher ed). Contribution limits are relatively low and subject to income restrictions.
  • Roth IRA: Primarily a retirement vehicle, but contributions (not earnings) can be withdrawn at any time tax- and penalty-free, offering a flexible source for education expenses. Some early-withdrawal penalties on earnings can be waived for qualified higher-education costs, but earnings may still be taxable—check IRS rules.
  • High-yield savings accounts / CDs: FDIC-insured, low risk, and useful for near-term expenses or a tuition payment sitting in cash.
  • Taxable brokerage accounts: Fully flexible, potentially higher long-term returns, and tax-efficient if you use long-term capital gains strategies, but withdrawals are fully taxable on gains and may affect financial aid.

Key pros and cons

  • Flexibility: Custodial and taxable accounts win—funds can be used for anything. ESAs and Roth IRAs have education-friendly features but different restrictions.
  • Tax advantages: Coverdell ESAs give tax-free withdrawals for qualified education expenses. 529 plans generally lead in tax benefits, but Roth IRAs allow tax-free growth for retirement and penalty-free withdrawals of contributions.
  • Control and ownership: Custodial accounts transfer control to the child at majority; Roth IRAs and ESAs keep the owner’s control according to plan rules.
  • Financial aid impact: Accounts owned by the student (including UGMA/UTMA) typically reduce need-based aid more than parent-owned accounts. Each account type affects FAFSA calculations differently—plan accordingly.

Tax and financial-aid considerations (what to know in 2025)

  • Tax rules: Coverdell ESAs provide tax-free distributions for qualified expenses when rules are followed (see IRS Publication 970). Roth IRA contributions may be withdrawn tax- and penalty-free at any time. Earnings withdrawn before retirement may be subject to income tax and possibly a 10% early-distribution penalty; however, the penalty can be waived for qualified education expenses though earnings may still be taxable (see IRS Publication 590-B).
  • Kiddie tax and custodial accounts: Unearned income in custodial accounts can be taxed under the “kiddie tax,” which may cause a child’s investment income to be taxed at the parents’ marginal rate for higher amounts. Check the current IRS rules on unearned income taxation for dependents.
  • Financial aid: Assets held in a custodial account typically count as the student’s assets on the FAFSA and can reduce need-based aid eligibility more than parent-owned assets. Parent-owned retirement and taxable accounts are treated differently. For guidance, see the U.S. Department of Education and FAFSA instructions.

Eligibility and practical limits

  • Custodial accounts: Any adult can open one for a minor, but the minor gains control at the state-specified age of majority (often 18 or 21; some states allow 25). That transfer of control is permanent.
  • Coverdell ESAs: Contributions are subject to income limits and a $2,000 annual maximum per beneficiary (the Coverdell contribution cap has remained low historically; verify current limits and phase-out thresholds). Funds must be used for qualified education expenses or distributed under rules that can impose taxes and penalties.
  • Roth IRAs: Requires earned income for contributions. You can contribute only up to earned income in a year and within IRA contribution limits; minors with earned income (e.g., part-time jobs) can contribute.

Actionable strategies—how I’ve used these accounts in practice

1) Layered approach (my most common recommendation)

  • Short-term / near-term costs (next 0–5 years): Use high-yield savings or a short-term CD to avoid market volatility.
  • Medium-term (5–10 years): Split between a custodial account and a taxable brokerage if you want growth and flexibility.
  • Long-term / flexible growth: Maximize Roth IRA contributions where eligible (for earners) because you get retirement savings with the fallback option to access contributions for education.

2) Coverdell plus custodial combo

  • Small Coverdell contributions for K–12 or early college costs (books, tuition, supplies) and a custodial account for flexible spending needs like room and board or a gap year.

3) Taxable account for maximum flexibility

  • For families who want absolute freedom on use (study abroad, entrepreneurship post-college), a taxable brokerage account can be best. Use tax-loss harvesting and long-term holdings to reduce tax drag.

Real-world examples

  • Family A: Mom opened an UTMA and a high-yield savings account. The UTMA invested in a diversified ETF portfolio for growth, and the savings account covered freshman-year deposits. Because the child’s UTMA balance became their asset at age 21, Mom planned to gift additional funds if the child needed more.

  • Family B: Parents used a small Coverdell ESA for K–12 tutoring and a Roth IRA (for the working parent) as a backup. When the student accepted a scholarship, the Roth funds remained available for retirement.

Top mistakes I see and how to avoid them

  • Relying solely on one account type: Combine accounts to balance tax savings, flexibility, and financial-aid implications.
  • Ignoring financial-aid rules: An otherwise well-funded custodial account can reduce need-based aid substantially if not planned for.
  • Overlooking taxes on unearned income: Remember the kiddie tax and potential parent-level taxation.

Step-by-step checklist to get started

  1. Define goals: Is the priority minimizing taxes, preserving financial-aid eligibility, or keeping flexibility? Write a 5– and 10–year plan.
  2. Allocate: Decide which account types match your time horizon (cash for short-term, growth accounts for long-term).
  3. Open accounts: Custodial at a brokerage or bank; Coverdell at a custodian that offers ESAs; Roth IRA at any brokerage if you or the child have earned income.
  4. Automate contributions: Use automatic transfers to enforce discipline and benefit from dollar-cost averaging.
  5. Revisit annually: Update plans as the child ages, income changes, or tax rules are updated.

How these options compare to a 529 plan

For a detailed comparison of tradeoffs versus 529 plans, see our guide on education-saving tradeoffs, including UTMA and trusts (Education Savings Tradeoffs: 529 Plans vs UTMA vs Trusts). If you want a broader survey of alternatives beyond 529s, read Education Funding Strategies Beyond 529 Plans for additional context and examples.

Resources and authoritative reading

Professional note from the author

In my practice I tailor a mix of accounts to a family’s goals and likelihood of needing financial aid. A Roth IRA is often attractive because it supports retirement while providing a fallback for education, but it’s not a substitute for a dedicated education account if you need the best tax-free education growth. Blending a safe short-term cash buffer, a taxable or custodial long-term growth account, and a Roth IRA for savers with earned income usually covers most family scenarios.

Common questions (short answers)

  • Can I combine methods? Yes—diversification across account types is often the smartest approach.
  • Will custodial accounts hurt financial aid? They can—custodial assets are treated as student assets on FAFSA and may reduce need-based aid more than parent-owned options.
  • Are Coverdell ESAs still useful with low contribution limits? Yes for targeted expenses (K–12 or smaller college costs) because distributions are tax-free when used appropriately.

Professional disclaimer

This article provides general educational information and should not be taken as personal tax or investment advice. Rules for taxation, financial aid, and retirement accounts change. Consult a certified financial planner or tax advisor for recommendations tailored to your specific situation.

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