529 Plans and Other Good Education Accounts for Your Family

The importance of planning for education costs

529 plans: The traditional education savings plan

For many families, a 529 plan is the go-to way to save for future education expenses. 529 plans are state-sponsored investment accounts designed specifically to help families grow money tax-free when it’s used for qualified education costs of the designated beneficiary. Qualified expenses include tuition, fees and books alongside other costs like room and board, at eligible educational institutions.

When you contribute to a 529 plan, your money is invested in portfolios that typically include mutual funds or other age-based options that become more conservative as your child gets closer to college. Earnings grow tax-deferred, with tax-free withdrawals for qualified education expenses.

Why 529 plans may be a good option

A primary advantage of a 529 plan is tax efficiency. Contributions to the plan are made with after-tax dollars, and while contributions aren’t deductible at the federal level, many states do offer deductions or credits that can lower your state tax bill. Over time, this combination of tax-deferred growth and potential state benefits can make a noticeable difference towards education savings.

Flexibility is another strength of the 529 plan. If your child doesn’t need the funds, you can transfer the account to another family member, penalty-free.

If the beneficiary earns a scholarship, you can also withdraw up to that amount from the plan without paying penalties on the earnings. Note that while the 10% penalty would be waived in this situation, you’ll still have to pay income tax on the gains that are withdrawn. 529 plans can also be used for graduate school, another example of their flexibility.

529 plans are also no longer limited to college expenses. Under federal law, you can use up to $10,000 per year for K–12 tuition, although state tax treatment may vary.

When it comes to student loan repayment, 529 funds can be used for a lifetime maximum of $10,000 per beneficiary. Many plans can also be used for qualified apprenticeship programs, another example of their versatility for many education paths.

Coverdell Education Savings Accounts (ESAs)

If control over investment choices of your K-12 and college education savings is important to you, consider a Coverdell Education Savings Account (ESA). Like a 529 plan, ESA contributions grow tax-free, meaning withdrawals for qualified education expenses aren’t taxed. The annual contribution limit is $2,000 per child, with eligibility phasing out for higher-income households depending on the year. You can make contributions for your beneficiaries until they reach 18.

While the contribution limit is lower than 529 plans, ESAs let you invest in a wider variety of assets, like individual stocks or bonds, giving you more flexibility in how the account is managed.

For families who qualify, ESAs can complement a 529 plan by covering expenses like private school tuition, tutoring or even technology needs that might not fall under a 529’s qualified categories.

Custodial accounts for education: Flexible but less tax-favored

There are two types of custodial accounts: UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act) accounts. Both can help you save for education expenses, but with a few key differences from 529 plans or ESAs. The UGMA is allowed in all 50 states, and UTMA is allowed in all except Vermont and South Carolina.

Custodial accounts are owned by an adult on behalf of a minor. The contributions can be cash or investments, and the funds legally belong to the child once they reach adulthood (typically age 18 or 21, depending on the state). There are no contribution limits, and the money can be used for anything.

Custodial accounts don’t offer tax advantages like 529s or ESAs, but their flexibility means they can cover more than education costs. They’re often used by families who want to give a child an early start in saving and investing or by grandparents looking for a simple way to contribute to a loved one’s future.

Emerging options: What are “Trump Accounts” and what to know

A newer option expected to potentially be available in Q3 of 2026 are the “Trump Accounts,” recently proposed in the One Big Beautiful Bill Act (OBBBA). These proposed accounts would provide a government seed deposit of $1,000 for eligible children. Families could make annual contributions up to $5,000 that grow over time. Employers could also make an annual contribution up to $2,500 that wouldn’t affect the employee’s taxable income. These accounts don’t allow withdrawals before the beneficiary is 18; after that, they’d be treated as a traditional IRA.

While Trump Accounts are still in development and not yet available, the concept shares some similarities and potential benefits with other education savings accounts.

For now, 529s and Coverdell ESAs remain the most proven and tax-efficient tools for families focused primarily on education savings.

Other education savings options

In addition to 529s and ESAs, several other tools can play a supporting role in your education savings plan:

• Roth IRA: Although designed for retirement, a Roth IRA allows you to withdraw contributions (but not earnings) penalty-free for qualified education expenses. This can offer additional flexibility if your goals change over time.
• Savings bonds: Series EE and I bonds issued by the U.S. Treasury are low-risk investments that can provide tax-free interest if used for education, depending on your income.
• High-yield savings or money market accounts: For short-term goals like saving for next year’s tuition or a specific milestone, these accounts offer easy access to funds while earning competitive interest rates.

Choosing the right education savings strategy

The best education account will always depend on your family’s financial situation, timeline and goals regarding flexibility.

If college savings is the primary goal, a 529 plan is typically the most beneficial due to its tax advantages and high contribution limits.

For those wanting to include K–12 expenses or to diversify investments, pairing a 529 with a Coverdell ESA may provide broader coverage, given income requirements. Families who value flexibility or anticipate different needs might find that a custodial account offers more freedom, at the expense of tax advantages.

When deciding, consider these points:

• Income and state tax benefits: Some states reward 529 contributions with deductions or credits, while others don’t. Check for different state-specific requirements or tax benefits before committing to a plan.
• Your timeline: The longer your money can grow, the more potential that investment has to build greater value.
• Control and purpose: Custodial accounts transfer ownership to the child, while 529s and ESAs allow the contributor to retain control of the funds.

Combining different types of accounts can also be effective when saving for larger goals like college tuition. If you’d like help comparing options or setting up an education savings plan that fits your goals, connect with a financial advisor or visit your local Associated Bank branch.