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Saving for college: What to know about your options

Understand the different saving vehicles to help stay ahead of rising education expenses and reach your goals.

There are a wide array of investing options to save for college, but choosing the right one for your family will depend on your priorities, time horizon, long-term goals and tax situation. 

An Ameriprise financial advisor will help you evaluate the different possibilities and develop a saving strategy that makes sense for you and your other long-term goals. 

Here’s what to consider as you choose an appropriate saving vehicle for your situation.

In this article:

  1. Start with estimating costs and setting your savings goal
  2. Consider the pros and cons of different savings options and tax advantages
    1. 529 plan
    2. Coverdell Education Savings Account
    3. Cash-value life insurance
    4. Other college savings options
  3.  Implement your plan
  4. Questions to ask an Ameriprise financial advisor


1. Start with estimating costs and setting your savings goal

Understanding the overall cost of your student’s education experience, including their lifestyle expenses, may give you a target to strive for, and help you determine which saving vehicle fits your goals. The number doesn’t have to be exact as you can always change the goal as your child’s interests and aspirations evolve. Consider using our college savings calculator to determine how much you may need to start saving. 

2. Consider the pros and cons of different savings options and tax advantages

As you save for college education, your strategy may include one or more savings vehicle, depending on your situation. There are different tax implications and considerations for each option.

529 plan    

One of the popular options to save for college is a 529 plan, which is a tax-advantaged account primarily intended for higher education expenses.

A 529 plan allows an individual to contribute after-tax money into an investment account on behalf of a designated beneficiary. Almost all U.S. states offer a 529 plan, and investors are generally free to shop around for a plan that works for them, regardless of their residency status.

Here are some pros and cons:

Pros Cons 
  • Contributions grow tax-deferred, and withdrawals are tax free as long as they are used for qualified education expenses, which include tuition, room and board, books, fees and even student loan repayment.
  • Convenient way for extended family to contribute: Allows a parent, grandparent (or almost anyone) to invest money on behalf of the plan’s specified beneficiary (typically a child or grandchild).
  • No income limits: No income constraints on account owners.
  • No age limits: Beneficiaries can be any age.
  • Flexibility and control over beneficiaries: The owner can easily change the beneficiary to transfer unused assets.
  • Potential for additional state tax benefits: Some states offer additional tax benefits if residents use their 529 plan.
  • Can move unused funds into a Roth IRA: Beginning in 2024, unused funds in 529 plans that are at least 15 years old can be transferred to the beneficiary’s Roth IRA, up to annual income and lifetime limits.
  • Only cash contributions are accepted: (e.g., checks, money orders, credit card payments). You can't contribute stocks, bonds or mutual funds.
  • Impact on financial aid: Contributions and distributions may affect need-based financial aid.
  • Fees: Annual expenses and fees for maintaining the accounts can add up.


Bottom line: A 529 plan can be a powerful college saving vehicle. There are many reasons why these are a popular account for education goals, but it’s necessary to understand how it works before you can take full advantage of it.


Coverdell Education Savings Account 

Formerly known as an Education IRA, a Coverdell Education Savings Account (ESA) is a college savings option similar to a 529 plan in that contributions grow tax-deferred — but come with more limitations.

Pros Cons
  • Contributions grow tax-deferred, and withdrawals are tax free as long as they are used for qualified education expenses, which include tuition, room and board, books, fees and even student loan repayment.
  • Investment options: There are generally more investment options available with a Coverdell than with a 529 plan.
  • Withdrawals can be used toward private school tuition, tutoring and computers, tax-free: The child must use the funds before age 30 unless they are a special needs beneficiary.
  • Smaller contribution limit: Families can only contribute a maximum of $2,000 per year per child to an ESA.
  • Income limits on the account owner: In 2023, the limit is $110,000 for single filers and $220,000 for married couples.
  • Age limit on beneficiaries: Contributions to the account must generally be made before the beneficiary turns 18.
  • Limited withdrawal window: Any assets in the account must be withdrawn before the beneficiary turns 30.
  • Impact on financial aid: Contributions and distributions may affect need-based financial aid.
  • Fees: Annual expenses and fees for maintaining the accounts can add up. 


Bottom line: A Coverdell ESA can be a useful vehicle, but it offers less flexibility and savings potential than a 529 plan.


Cash-value life insurance 

With a cash-value life insurance policy, a portion of your premiums goes toward a death benefit and another portion is allocated into a cash-value account. When properly structured, you can take out an income tax-free loan against your cash value to pay for school.

Pros Cons
  • Not counted by the FAFSA: Life insurance is not counted as a parental asset in the Free Application for Federal Student Aid (FAFSA).
  • Flexibility with cash value: The policy’s cash value can be used for any costs — not just qualified educational expenses. For example, it can be used to pay down consumer debt as you’re saving for college or help pay off student loans later. 
  • Low-interest and tax-free loan: You need to borrow against the cash value of the policy.
  • Impact on death benefit: Taking a loan against the cash value will affect the net death benefit.  
  • Affordability: It may not be the most affordable option for saving since it can take time for the cash value to outgrow the cost of premiums.
  • Fees: Annual expenses and fees for maintaining the accounts can add up. 


Bottom line: Permanent life insurance can offer investors an alternative way to pay for their student’s educational expenses. But college savings shouldn’t be the primary goal when deciding whether to open a policy. 

Other college savings options

In addition to the above vehicles, below are a few other college saving options. For brokerage or savings accounts, you could set up an account dedicated to each student you are saving for, if you choose.

Please note: These options don’t have the same tax advantages as the accounts mentioned above and generally aren’t as optimal for college saving goals.

Brokerage accounts

The biggest benefit of using a traditional investment account to fund your child’s college is the flexibility and freedom it offers. These accounts don’t have limitations on how you spend your assets, what funds you can invest in or how much you can contribute.

However, you won’t receive any of the tax advantages if you were to use a 529 plan or Coverdell ESA. Instead, after-tax dollars fund brokerage accounts, and withdrawals are taxed as capital gains. 

Bottom line: Using traditional brokerage accounts to save for your child’s education does not offer tax efficiencies. However, these accounts leave more flexibility for use of the funds than tax-advantaged college savings options. If you are willing to forgo potential tax savings in favor of more flexibility, then a brokerage account may be a good option to include in your strategy.

Savings accounts/CDs

While traditional savings accounts and certificates of deposits (CDs) may keep your money out of the market and can be lower risk, their earning potential doesn’t make them an ideal long-term college savings option for parents seeking to pay big expenses, such as tuition. Generally, the rate of return on these types of accounts doesn't keep pace with inflation or rising college expenses.

In many cases, these accounts are better used to build a cash reserve and save for less significant college costs that have a shorter time horizon and don’t count as a qualified higher education expense. For example, if your child is a year out from college and you want to help furnish their dormitory, a savings account is a smart place to accumulate funds for that short-term goal.

Bottom line: Savings accounts and CDs don't provide the same opportunity for long-term growth as investment options, however, as you get closer to your student’s college years, savings accounts and CDs can be helpful vehicles to keep your money liquid for smaller expenses.

Retirement accounts

If you withdraw from a 401(k) or an IRA to fund your child’s college costs, you may be subject to additional costs, such as income tax or early withdrawal fees, and you are also impacting your future retirement income. Overall, using a retirement account is generally not advisable to save for a child’s college expenses.

Bottom line: When it comes to balancing retirement and saving for college, retirement should be your priority. Remember: You can’t get a loan to fund your retirement years.

3. Implement your plan

Once you’ve settled on the college savings options that work for you, it’s time to open your preferred account and start saving to help reach your education goal(s).

Advice spotlight

Automate your college contributions.
Like retirement planning, set up weekly or monthly contributions to your college savings account to save incrementally and effortlessly.

How should I approach my education savings goal along with my other financial priorities and goals, including retirement? Which savings vehicles can I consider for my education goal, including tax-advantaged options? How should I position my assets for the financial aid process?

When you’re ready to reach out to an Ameriprise financial advisor for a complimentary initial consultation, consider bringing these questions to your meeting.

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Let’s talk through your options

An Ameriprise financial advisor will help weigh the pros and cons of various college savings options and make a recommendation aligned with your other goals and financial situation.

Find a savings vehicle that’s right for your family’s education goals with the help of an Ameriprise financial advisor.

Or, request an appointment online to speak with an advisor.


At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's. 

If you know someone who could benefit from a conversation, please refer me.

Background and qualification information is available at FINRA's BrokerCheck website.

This information is being provided only as a general source of information and is not a solicitation to buy or sell any securities, accounts or strategies mentioned.  The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor.  Please seek the advice of a financial advisor regarding your particular financial situation.


Clients contributing to a 529 Plan offered by a state in which they are not a resident, should consider, before investing, whether their, or their designated beneficiary(s) home state offers any state tax or other state benefits such as financial aid, scholarship funds or protection from creditors that are only available for investments in such state’s qualified tuition program.


The earnings portion of money withdrawn from a 529 plan that is not spent on eligible expenses will be subject to income tax, an additional 10% federal tax penalty, and the possibility of a recapture of any state tax deductions or credits taken.


Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.


Ameriprise Financial cannot guarantee future financial results.


The initial consultation provides an overview of financial planning concepts.  You will not receive written analysis and/or recommendations.


Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.


Securities offered by Ameriprise Financial Services, LLC. Member FINRA and SIPC.

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