Introduction

Graduate school is expensive and often has different funding dynamics than undergraduate programs. While 529 plans remain a strong tool for some families, they are not the only—or always the best—option for graduate-level expenses. This guide explains practical alternatives, tax rules you should know, and how to combine strategies so you can enter grad school with less borrowing and more financial flexibility.

Why graduate costs demand a different approach

  • Timing: Many graduate students are older and either earning or saving later than undergrads. That affects account selection and contribution limits.
  • Expense mix: Grad costs often include professional fees, licensing exams, and living expenses that don’t all qualify under some tax-advantaged plans.
  • Income phase-ins: Returning students may have employer benefits or retirement accounts that weren’t available earlier.

Options beyond the 529: clear pros and cons

1) Roth IRA (contributions as flexible emergency/education fund)

  • What it is: Roth IRAs are retirement accounts funded with after-tax dollars. As of 2025, Roth contribution rules and income limits still apply (see IRS guidance).
  • How it helps grad-school savers: You can always withdraw Roth IRA contributions (not earnings) tax- and penalty-free for any purpose, including tuition and living costs. Under limited circumstances, qualified education distributions may avoid the 10% early-withdrawal penalty on earnings (see IRS Publication 970) though earnings may be taxable unless an exception applies.
  • Pros: Flexibility—if you don’t use the money for school it remains for retirement. Strong tax diversification.
  • Cons: Contribution limits (2025 limit: combined IRA contributions are $6,500 under age 50, $7,500 age 50+ — verify current limits) and income phaseouts may restrict eligibility. Withdrawing earnings can trigger taxes and penalties.

2) Employer tuition assistance

  • What it is: Many employers offer tuition reimbursement or assistance programs. Under IRC Section 127, up to $5,250 per year of employer-provided educational assistance can be excluded from your taxable income (IRS.gov).
  • How it helps: Employer funding directly lowers your out-of-pocket cost and rarely requires dipping into savings.
  • Pros: Free money that can cover partial or full tuition.
  • Cons: Programs often have strings attached—service commitments, grade requirements, or restrictions on degree types. Confirm tax treatment and plan rules with HR.

3) Taxable investment accounts and high-yield savings

  • What it is: Standard brokerage or savings accounts used strategically for short to medium-term goals.
  • How it helps: No contribution limits, full liquidity, and no penalties for use on education costs.
  • Pros: Simplicity and flexibility. Good when you want to avoid restrictions.
  • Cons: Investment gains are taxable; less tax-preferred growth than 529s or Roth IRAs.

4) Custodial accounts (UGMA/UTMA)

  • What it is: Accounts held for a minor that become the child’s property at the legal age set by the state.
  • How it helps: Funds can be used for graduate school, but ownership may affect financial aid eligibility more than parent-owned accounts.
  • Pros: Flexible use; can fund any education or non-education costs.
  • Cons: Loss of parental control at transfer age; potential negative impact on federal financial aid (student assets are assessed more heavily).

5) HSAs (Health Savings Accounts) — an indirect tool

  • What it is: HSAs are tax-advantaged accounts for qualified medical expenses when paired with an HDHP.
  • How it helps: Not a primary education account, but if you are disciplined with medical spending you can preserve other funds for school and use HSA money to cover healthcare costs while in grad school (HSA funds grow tax-free for eligible medical expenses and, after age 65, can be used for any purpose without penalty—taxable if not for medical expenses).
  • Pros: Triple tax advantage for medical costs and potential retirement backstop.
  • Cons: Limited to medical expenses and requires HDHP eligibility.

6) Federal and private loans (as part of a strategy)

  • Reality check: Even with strong savings, some students combine savings and borrowing. Federal graduate loans (Direct Unsubsidized, Grad PLUS) have fixed rules, potential consolidation options, and income-driven repayment programs administered by Federal Student Aid (studentaid.gov). Keep loans as a planned, limited portion of funding, not an opening to overspend.

Tactical combinations I recommend (from my practice)

  • Working adult returning for grad school: Maximize employer tuition assistance first (confirm tax and contract terms). Then use a Roth IRA for flexible savings; if eligible, consider making non-deductible traditional IRA contributions as part of a conversion ladder strategy if tax planning favors that route.
  • Recent undergrad saving ahead of potential grad school: Use a 529 for undergrad, but hold a taxable brokerage account or Roth IRA for grad school flexibility. If you decide not to attend grad school, taxable accounts have no penalty for repurposing.
  • Parents saving for a child’s long-term path: If you want control and tax benefits, 529s usually remain preferable for undergraduate costs and sometimes for grad expenses (qualified grad expenses apply). Pair with a UTMA only if you want more flexible uses and accept the tradeoffs for financial-aid impact.

How to decide: checklist

  • Confirm eligible expenses (IRS Publication 970) before assuming tax-free treatment.
  • Inventory employer benefits and read plan documents—ask HR whether tuition assistance is taxable or requires repayment.
  • Model cash flow: estimate total costs, likely scholarships, assistantships, and expected wages during school.
  • Stress test scenarios: run a conservative estimate for living costs and a higher-cost estimate for tuition hikes.
  • Prioritize emergency savings and retirement. Don’t sacrifice retirement contributions for uncertain education needs unless the payoff is clear.

Tax and aid implications to watch

  • Financial aid: Asset ownership and account type affect Expected Family Contribution (EFC)/Student Aid Index (SAI). Parent-owned 529s usually have a smaller impact on aid eligibility than student-owned custodial accounts.
  • IRS rules: See IRS Publication 970 for education-related tax rules and IRS pages on Roth IRAs for distribution rules. Employer assistance and fringe benefits guidance appears at IRS Topic 513 and related pages—confirm Section 127 details with your tax advisor (IRS.gov).
  • Reporting: Employer tuition assistance may be reported on Form W-2 or excluded; distributions from retirement accounts may generate 1099-R forms.

Real-world examples (short)

  • Example 1: A working nurse used employer tuition assistance ($4,000/year) plus a Roth IRA contribution to cover a portion of a Master’s in Nursing. The employer benefit eliminated about half the tuition while the Roth covered living expenses, and the student kept loan borrowing to a minimum.
  • Example 2: A parent used a mix of 529 funds for undergrad and a taxable brokerage account to seed a child’s future grad school costs. When the child decided to pursue a PhD with stipends, remaining funds were reallocated to a junior’s Roth IRA.

Common mistakes I see

  • Treating one account as a one-size-fits-all solution—each account has tradeoffs.
  • Ignoring the effect of custodial accounts on financial aid eligibility.
  • Assuming employer tuition assistance is always tax-free or unconditional. Read the fine print.

Action plan: next steps in 30/90/180 days

  • 30 days: Gather current tuition estimates and employer benefit documents. Check your eligibility for Roth contributions and review current IRA limits on IRS.gov.
  • 90 days: Open or top up accounts—Roth IRA, a taxable brokerage account, or an HSA if eligible. Meet with HR to understand tuition benefit details.
  • 180 days: Re-run your funding projection with updated savings growth and any scholarship or assistantship offers.

Further reading and internal resources

Authoritative sources

  • IRS Publication 970, Tax Benefits for Education (IRS.gov)
  • Employer-provided educational assistance and IRC Section 127 details (IRS.gov)
  • Federal Student Aid resources on graduate loans and repayment (studentaid.gov)
  • Consumer Financial Protection Bureau: tools and guides on student loans and repayment (consumerfinance.gov)

Professional disclaimer

This article is educational and does not replace personalized financial, tax, or legal advice. In my practice working with clients saving for graduate degrees, I recommend speaking with a certified financial planner or tax professional who can review your full financial picture and current tax-year rules.