Smart Education Planning, Part 2: What Accounts to Use & How to Use Them

MaryLucy Bergeron, CFP®

Building a Smarter College Savings Strategy, One Account at a Time

In Part 1 of our college planning series, we talked about how much to save and when to start. Now let’s take the next step: understanding where to save. Choosing the right account is just as important as deciding how much to set aside. The account you use can affect your taxes, your child’s financial aid eligibility, your investment flexibility, and how the money can be used down the line.

There are several tools available to help families save for education, and each comes with benefits and drawbacks.

529 Plans

529 plans are one of the most powerful tools available for education savings, and for good reason. The benefit of a 529 is its tax-free growth and tax-free withdrawals when used for qualified education expenses. By allowing your savings to grow without the drag of taxes, you get to keep more of your money working for you—especially important when funding something as expensive as a college education.

Beyond the federal tax advantages, many states offer their own tax incentives. These may come in the form of state income tax deductions or credits for contributions made to an in-state plan. Depending on your state’s tax laws, this could provide an immediate and meaningful boost to your overall savings plan.

Thanks to the SECURE Act 2.0, families now have even greater flexibility with how unused 529 funds can be handled. If your child receives scholarships, chooses not to attend college, or simply doesn’t use the full balance, you can now roll over up to $35,000 of unused funds into a Roth IRA for the beneficiary—subject to annual Roth contribution limits and other restrictions. This provision has significantly reduced the fear of “over-saving” in a 529 and reinforces the account’s role as a central, long-term planning tool.

Another often-overlooked advantage of 529 plans is their estate planning benefit. Contributions to a 529 are considered completed gifts for tax purposes, meaning they can help reduce the size of your taxable estate. Better yet, the IRS allows for a special five-year gift tax averaging rule, where you can front-load five years’ worth of contributions—up to $90,000 per beneficiary in 2025 for individual donors ($180,000 for married couples)—without triggering gift taxes. This can be a powerful way for grandparents or high-net-worth individuals to support education while also executing a broader wealth transfer strategy.

Who owns the account matters significantly when it comes to financial aid. If a parent owns the 529 account, the balance is considered a parental asset on the Free Application for Federal Student Aid (FAFSA), and only up to 5.64% of the value is counted in the Expected Family Contribution (EFC) calculation. This is much more favorable than student-owned assets, which are assessed at a much higher rate—up to 20%.

Previously, 529 plans owned by grandparents were problematic for financial aid purposes. Distributions were counted as untaxed student income, which could significantly reduce aid eligibility. However, starting with the 2024–25 FAFSA, these distributions are no longer counted at all, meaning they have a 0% impact on the student’s aid calculation. This change has made grandparent-held 529s a much more strategic and aid-friendly option for families.

In short, the 529 plan is not only a tax-efficient way to grow your college savings, but it also aligns well with financial aid strategies and long-term flexibility. It remains one of the best places to start when building an education savings plan.

UTMA/UGMA Custodial Accounts

Custodial accounts under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) are another way to save for a child’s future. These accounts offer broad flexibility: funds can be used for anything that benefits the child, not just education. This could include music lessons, travel, extracurricular programs, a car, or even a down payment on a first home.

Unlike some education-focused accounts, custodial accounts don’t offer tax-free growth or state tax deductions. Any earnings—such as interest, dividends, or investment gains—are taxed every year, either at the parents’ or the child’s tax rate, depending on the amount. This ongoing taxation can gradually reduce the account’s growth, making it less efficient compared to tax-advantaged options like 529 plans or Roth IRAs, which allow your money to grow tax-free and may also offer state tax benefits.

From a financial aid standpoint, custodial accounts count as the student’s asset, which can have a greater impact on aid eligibility (up to 20% of the asset value may be counted on the FAFSA). This can be significant when calculating the Expected Family Contribution and could reduce your child’s eligibility for need-based aid.

One important caveat with UTMAs/UGMAs is that ownership of the account transfers to the child when they reach the age of majority—typically 18 or 21, depending on the state. In Louisiana, it is age 22.

At that point, they gain full legal control of the funds and can use them however they choose, regardless of the parents’ original intentions. While some families are comfortable with this level of autonomy, others may prefer more control over how the funds are used. If that’s a concern, a 529 plan or trust-based solution may offer greater peace of mind while still supporting your savings goals.

Roth IRAs for Parents or Teens

Roth IRAs are typically seen as retirement vehicles, but they can play a strategic role in education planning as well. For parents, a Roth IRA offers tax-advantaged growth, and contributions can be withdrawn at any time without penalty or taxes. This means you can access your contributions to help pay for education costs while keeping earnings invested and growing tax-free for retirement.

Earnings can also be withdrawn penalty-free (but not tax-free) for qualified education expenses. This makes Roth IRAs a hybrid account for those who want to keep options open between college funding and retirement savings. It’s a great solution for families who may want to prioritize retirement savings but also need a backup funding source for college.

One advantage of using a Roth IRA is that assets held in retirement accounts are not counted at all on the FAFSA, making them invisible in the financial aid formula. This can work in your favor if you’re aiming to maximize aid eligibility while still preparing for the possibility of out-of-pocket college costs.

For teens with part-time or summer jobs, Roth IRAs can be a powerful tool for building both long-term wealth and healthy financial habits. Contributions must come from earned income, and there are annual limits (currently $7,000 for those under age 50 in 2025) and income restrictions to keep in mind. But helping your teen open a Roth IRA and even matching their contributions—up to what they’ve earned—can turn their early earnings into a valuable lesson in investing, taxes, and long-term planning. Even small amounts contributed now can benefit from decades of compound growth, giving them a meaningful head start toward retirement while reinforcing financial literacy.

Taxable Investment Accounts

For families looking for maximum flexibility, taxable brokerage accounts can be a helpful piece of the strategy. These accounts have no contribution limits, no income restrictions, and no penalties for withdrawing funds at any time. You can use the money for any purpose, whether that's college, starting a business, helping with a wedding, purchasing a car, or even taking a gap year.

Unlike 529s or Roth IRAs, taxable accounts don’t offer specific tax advantages for education. Dividends, interest, and capital gains are taxable annually, and any sales of investments may trigger capital gains taxes. Proper tax management—such as tax-loss harvesting or holding assets long-term to qualify for lower capital gains rates—can help mitigate this, but the tax drag can still reduce overall returns.

From a financial aid standpoint, these accounts can also count against you, depending on the ownership. If the account is in the parent’s name, a portion (up to 5.64%) is included in the Expected Family Contribution. If it’s in the student’s name, up to 20% could be counted, just like with custodial accounts.

While taxable accounts don’t offer the same tax advantages as other savings vehicles, they can play an important role for families who’ve already maxed out tax-advantaged options or want more flexibility. These accounts are ideal for “overflow” savings, especially if you’re unsure whether your child will attend college or want to retain full control over how and when the funds are used.

They also provide a useful buffer for life’s unpredictability. If your child chooses a non-traditional path—like starting a business, taking a gap year, or pursuing an unpaid internship—taxable accounts offer the freedom to support those goals without penalties or restrictions that may come with education-specific accounts.

How to Choose the Right Mix

Choosing the right combination of accounts is all about matching tools to your goals, values, and financial situation. Are you aiming to minimize your out-of-pocket college costs? Maximize your child’s eligibility for financial aid? Preserve flexibility in case your child takes a non-traditional path? Or maybe it’s a mix of all three. Clarifying your priorities helps determine how aggressive your savings need to be and which accounts offer the best fit.

If maximizing financial aid is a priority, a 529 plan or parent-owned Roth IRA is often the most favorable option. These accounts are either lightly counted—or not counted at all—under the FAFSA formula, while also offering valuable tax advantages. For example, a parent-owned 529 plan is assessed at a maximum of 5.64% of its value for aid eligibility, compared to up to 20% for student-owned custodial accounts. Even better, distributions from grandparent-owned 529 plans are no longer counted as student income under the updated FAFSA rules, making them an even more aid-friendly strategy.

If flexibility is a top concern—such as the ability to pivot toward other financial goals or cover a variety of non-qualified education-related expenses—taxable brokerage accounts and custodial accounts may be useful additions. They don’t offer the same tax advantages as 529s or Roth IRAs, but they do provide freedom in how and when the funds can be used. This can be important if you want to support a child’s business venture, buy them a car, or help with graduate school.

With those account types in mind, how do you decide which to prioritize?

A tiered or layered approach works well for many families. Think of this like building an investment pyramid. At the base is a 529 plan—your account for tax-free growth and education-specific spending. Above that might be a Roth IRA for parents or teens, which adds optionality and long-term value. Finally, taxable accounts or custodial accounts can serve as overflow buckets to round out your plan and offer broad access for non-college-related needs.

It’s also important to remember that the right strategy evolves over time. What works when your child is 3 may need to be adjusted when they’re 13. That’s why regular check-ins and updates are key. Make sure your account mix still aligns with your goals, risk tolerance, and any changes in tax or financial aid laws.

The bottom line? There’s no one-size-fits-all solution, but with the right mix of accounts and a clear understanding of how they work, you can create a flexible strategy that supports your child’s future and your peace of mind. It’s not about picking the “best” account, but balancing savings, accessibility, and tax benefits. A thoughtful mix helps optimize financial aid, minimize taxes, and adapt as your family’s needs evolve. Most importantly, start now and adjust as your goals change.

Looking Back at Part 1: Laying the Foundation—How Much to Save & When to Start

In the first part of our series, we explored how much to save for college and why starting early is key. We also covered the real cost of college, common saving mistakes, and how financial aid and scholarships can impact your plan—laying the groundwork for choosing the right accounts and spending strategies in the next posts.

Up Next in Part 3: Spending Education Funds Wisely

You’ve saved intentionally—now it’s time to use those dollars strategically. In the final part of our series, we’ll walk through how to make the most of your education savings. We’ll cover what qualifies as an eligible expense, how to coordinate tax credits with withdrawals, and smart strategies to avoid penalties. We’ll also share what to do with leftover 529 funds and how to stay flexible when plans change.

Stay tuned for tips that help you spend confidently and make every dollar count.

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