If you have big university dreams for your kids, then you know there’s a big tuition bill in your future. Get ready with our guide to everything you need to know about saving for college.

How much do you need to save for college? The answer, of course, varies widely: Community college or four-year university? Private or public? In-state or out-of-state? The latest reported data* on average annual tuition and fees shows anywhere from around $10,000 for a public, in-state institution to $36,801 for a private institution.

The best answer to the question of how much parents should save, then: As much as you possibly can, starting as early as you possibly can, balancing that priority with retirement and emergency fund savings.

First Step: Know Your Savings Options

There are a few college fund plans out there to choose from. Here are the ins, outs, and tax benefits of each.

529 Plans

What they are: 529 plans are tax-advantaged methods of saving for future education expenses, and are authorized by Section 529 of the Internal Revenue Code. Most 529 plans are sponsored at the state level, and there is also a 529 plan operated by a group of private colleges and universities.

529s are categorized one of two ways: As college savings plans or prepaid tuition plans.

  • College savings plans are similar to a Roth IRA in that you invest your after-tax contributions in mutual funds or similar investments. There are a variety of investment options, and your 529 account will increase or decrease in value based on investment performance.
  • Prepaid tuition plans work by allowing you to pay in advance for some or all of the costs of an in-state public education. You can convert these prepaid funds to pay for out-of-state or private education.

Where you can use these funds: More than 6,000 U.S. colleges and universities and 400 foreign colleges and universities are eligible. You can find eligible institutions here. 529 plans were also just expanded under the SECURE Act, and one of those expanded benefits include the costs of qualified apprenticeship/vocational training.

What the tax implications are: Contributions are post-tax, so you can’t deduct them from federal income taxes (although some states offer deductions or tax credits). Funds in your 529 plan account grow tax-free and will not be taxed when you withdraw the money to pay for qualified education expenses.

Financial tip: Not all 529 college savings plans are created equal—beware of the high fees and commissions charged for some. You are not required to invest in your own state’s plan, and can instead select a plan that’s right for you based on fees and investment options.

ESAs (Education IRAs)

What they are: Sometimes referred to as education IRAs, these plans are more formally known as Coverdell Education Savings Accounts, or ESAs. They’re similar to 529 plans, with a few differences. Make sure you talk through the many conditions these accounts have with your financial advisor: Tax law prohibits funding once the beneficiary is 18 years old; the annual per-child contribution limit is $2,000; and the account must be totally liquidated by the time the beneficiary is 30, or will be subject to tax and penalties.

Where you can use these funds: In addition to using ESAs to pay for college, they also offer a tax-free way to pay for K-12 private school.

What the tax implications are: Like 529 plans, ESAs work like Roth IRAs, allowing annual, nondeductible contributions to an investment account. Your investment grows tax-free and provided certain requirements are met, funds can be withdrawn tax-free for qualified educational expenses.

Financial tip: There are income limits to using ESAs. You won’t be eligible for an ESA if your adjusted gross income (AGI) is $110,000 or more (or $220,000 if filing jointly). In addition, if your modified AGI is more than $95,000, your contribution limits are reduced on a ratable basis.


What they are: UTMA stands for Uniform Transfers to Minors Act. UGMA stands for Uniform Gifts to Minors Act. These are custodial accounts, used to hold assets for minors until they are the age of majority in your state, and are not specifically for education expenses. When your child is of age, he or she can use the money for education expenses, invest the funds, or use them for other purposes.

The differences between UTMAs and UGMAs lie in that legally, they can each only hold specific types of assets. UTMAs come with more flexibility, allowing stocks, bonds, mutual funds, annuities, as well as alternative assets like real estate and collectibles. UGMAs can only hold stocks, bonds, mutual funds, and insurance-related investments.

Where you can use these funds: Your child can use the investment income to pay for any college expenses, but they aren’t limited to paying for college; they can use the money any way they would like.

What the tax implications are: Assets are considered the property of the minor, and any minor under the age of 19 (or under 24 if a full-time student) is allowed $1,100 in unearned income tax-free. The next $1,100 is taxed at the minor’s federal tax bracket. As of 2020, any unearned income in a custodial account in excess of $2,200 is taxed at the parent’s tax rate.

Financial tip: UTMAs/UGMAs are considered assets, and may make it more difficult to qualify for financial aid.

Need Help Deciding?

Ironwood Wealth Management can help you sort through the options and outline the best college fund that’s consistent with your overall financial plan. Make an appointment to talk to one of our advisors today.