Read time: 5 to 6 minutes
There are lots of ways to save for your child’s college education, and it can be fairly easy to find the best one to suit your family’s needs. But there’s also a strategy involved. We’ll walk you through it in this article.
Have a strategy
Coming up with a strategy to save for college can put you on a solid path. In fact, families with a strategy saved more—almost double—than families without one.1
Start saving early
How $25 a week can add up
John and Sue start saving for Justin’s college as soon as he’s born. They can only afford to save $25 a week.
By the time Justin has reached age 18 and is packing for college, their savings account has grown to more than $40,000.* That will cover the total costs of two years at State U. After accounting for Justin’s partial academic scholarship, John and Sue have about $20,000 left to fund. Justin will take out loans to pay for the remaining amount.
*Assumes a 6% average annual return. This is an example only. It doesn't represent a real investment, and the rate of return is not guaranteed. The account balance is before any taxes.
Decide how to save
You have several choices when it comes to saving for college. Check out the advantages of each in the chart and read on for more details.
| Savings options | Advantages | ||||||||
| Earning potential | Savings unlikely to impact financial aid | Account control | High contri-bution limits | Spending unlikely to reduce financial aid | Federal tax benefits | State tax benefits | Target enrollment portfolios | Spending flexibility | |
| 529 plans |  |
|
|
|
|
|
|
|
|
| General investing | |
|
|
|
|
||||
| Roth IRA | |
|
|
|
|||||
| UGMA/UTMA | |
|
|
||||||
529 plans
A 529 plan is a tax-advantaged investment account to save for future education expenses. You won’t owe federal or state taxes on 529 withdrawals if you spend the money on qualifying expenses, such as apprenticeship programs, room and board, supplies, equipment, computer hardware and software, and internet access. That makes every dollar go further.2
Many states offer a tax benefit such as credit for 529 contributions or a tax deduction. Our 529 state tax deduction calculator will tell you how much you might save in state taxes based on your personal situation.
Most 529 plans offer the convenience of age-based portfolios. These portfolios will automatically adjust their holdings based on your child’s age. They invest more in stocks when a child is young but shift more money from stocks to bonds and cash as a child gets older.
Look beyond your state’s 529 plan
Tax benefits, fees and fund costs, available investment choices, and initial investment amounts can vary greatly by state. Make sure you review your state’s 529 plan rules closely.
Some states allow a tax deduction for contributing to any 529 plan, including out-of-state plans, which may be more attractive than your state’s plan. If you broaden your search, you may find a top-rated, low-cost 529 plan offered nationally.
Check out 529 tax benefits by state to make your research a little easier.
The Vanguard 529 Plan
Sponsored by the state of Nevada, The Vanguard 529 Plan is one of the largest plans in the country. More than 350,000* investors across all 50 states have chosen The Vanguard 529 Plan to save for their education goals.
Our costs are among the lowest in the industry. We offer over 30 investment portfolios to suit your unique needs—including target enrollment portfolios—and our plan is backed by nearly 50 years of investment experience you can trust.
If you don’t use all of your 529 savings, you can transfer the balance to one of your other children, a grandchild, or another qualified family member.
As of 2024, SECURE Act 2.0 allows 529 account holders to rollover up to $35,000 to a Roth IRA when certain conditions are met.3
General investing accounts
A general investing account (or brokerage account) is an individual or joint account that can hold mutual funds, ETFs (exchange-traded funds), stocks, bonds, and more. The money can be used for any expense at any time. While general investing accounts don't have the same tax benefits as a 529 plan, they do offer flexibility in both spending and saving.
Learn more about Vanguard brokerage accounts.
Vanguard does not provide individual tax advice. You should discuss your situation with your tax advisor.
Roth IRAs
Roth IRA contributions can be withdrawn at any time without taxes or penalty. So contributions can be spent on college instead of retirement. But earnings cannot be withdrawn tax- and penalty-free unless the account is open at least five years and the owner has reached age 59½. That age restriction can limit the utility of a Roth IRA when paying college costs.
Withdrawals from a Roth IRA are tax-free if you are over age 59½ and have held the account for at least five years. Withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made.)
| UGMA | UTMA |
| A custodial investment account used to transfer financial assets to minors, such as cash, stocks, and bonds which are given as an irrevocable gift.4 | A custodial investment account used to transfer a broader range of assets to minors, such as financial securities, real estate, or art. The custodian manages and withdraws the minor’s assets for their benefit.4 |
Financial aid
When you apply for financial aid, you might be offered loans as part of your school’s financial aid offer. Student loans can come from the federal government, from private sources such as a bank or financial institution, or from other organizations. Federal student loans usually have more benefits than private loans5.
As the time to start college approaches, you’ll likely receive many offers to finance tuition. It can be easy—and therefore tempting—to get the money you need with just a signature. That makes it common for some to borrow more than they can afford.
1Source: Higher Ambitions: How America Plans for Post-secondary Education 2020. Sallie Mae and Ipsos. 2020.
2Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. The availability of tax or other benefits may be contingent on meeting other requirements. State tax treatment of withdrawals used for i) expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school, ii) expenses related to apprenticeship programs, or iii) student loan repayments is determined by the state(s) where the taxpayer files state income tax. Please consult with a tax advisor for further guidance.
3529 account rollover conditions: Certain restrictions apply, including to whom the assets may be transferred, a required holding period of 15 years, and limits on rollovers of contributions made within the 5 years prior to the rollover. The annual rollover limit is subject to Roth IRA annual contribution limits with a lifetime limit of $35,000 for each 529 account beneficiary. Consult your tax advisor prior to initiating a rollover.
4Western & Southern Financial Group. UTMA vs. UGMA Accounts: What’s the Difference? December 2023.
5Federal Student Aid. June 2024.
For more information about The Vanguard 529 College Savings Plan, visit vanguard.com to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor.
For more information about any 529 savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. If you are not a taxpayer of the state offering the plan, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors. Vanguard Marketing Corporation serves as distributor for some 529 plans.
The Vanguard 529 College Savings Plan is a Nevada Trust administered by the office of the Nevada State Treasurer.
The Vanguard Group, Inc., serves as the Investment Manager for The Vanguard 529 College Savings Plan and through its affiliate, Vanguard Marketing Corporation, markets and distributes the Plan. Ascensus Broker Dealer Services, LLC, serves as Program Manager and has overall responsibility for the day-to-day operations. The Plan's portfolios, although they invest in Vanguard mutual funds, are not mutual funds. Investment returns are not guaranteed, and you could lose money by investing in the Plan.
If you are not a Nevada taxpayer, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors.
Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.