College Funds for Kids: Find the Right One for Your Family

You dream of the day your kids walk across the stage to accept their college diplomas — and you know getting them there will require paying for school while avoiding student loan debt to the extent possible. Research shows that less than half of the 72 percent of parents who have started planning for their child's education have opened dedicated savings accounts.

When saving for your kid’s college, there are enormous benefits to opening a tax-advantaged college savings plan. Understanding the benefits of saving for college now can help save you thousands later. Our guide to two of the most popular college funds for kids (the 529 and the ESA) will help you decide which to use to finance your kid’s higher education.

Your Guide to Saving for Education Costs

Whether your child is in kindergarten or high school, there’s a college savings strategy that will put you on the right track. Which college savings option is right for your family? Here are the basics of how to start saving for your child’s college fund.

Education Savings Account (ESA) vs. 529: The Basics

These popular college savings strategies will help you and your child save for college.

529 Plan

A 529 is a state-sponsored plan that offers tax-advantaged investments to cover the cost of higher education. Each state offers at least one 529 plan where your money is invested on your behalf. The costs of plans and their investment selections differ from state-to-state. It’s possible to invest in a plan in another state if you find one that better fits your needs.

ESA

The Coverdell education savings account (ESA) is a tax-advantaged investment used to fund education. They are similar to 529 plans but typically come with more limits and restrictions. Education savings accounts can be used for K-12 expenses as well. 

Maximum Contributions

529 Plan: Each 529 plan establishes its own contribution limits, and the maximum contributions can be as high as $300,000 per student. 

ESA: The maximum contribution for an ESA is always $2,000 per year, from birth to age 18.

Tax Implications

For both 529 Plans and ESAs, contributions are not tax-deductible. The growth and withdrawals for qualifying educational expenses are tax-free. The contribution is considered a gift for tax purposes, meaning that to avoid the gift tax, cannot exceed the limit ($17,000 per contributor for 2023 and $18,000 in 2024), although under certain rules, you can make a one-time contribution of $85,000 ($170,000 for a couple) without incurring taxes for the gift.

Impact on Financial Aid

Funds for both types of plans are considered assets of the parent or the account owner.

Qualified Expenses

529 Plan: Funds can be spent on tuition, fees, room and board, books and supplies for higher education students. Families can also opt to use the 529 resources for apprenticeship and homeschool expenses, as well as student loan repayment. For K-12 education, funds can be applied toward the cost of tuition and fees. 

ESA: Funds can be used to cover tuition, fees, books, computers and other supplies. They can also be used for room and board for students enrolled at least part-time.

Restrictions

529 Plan: None. There are no time or age limits on a 529 college savings plan. Funds in a 529 account will never expire. If the money is not used for education, it can be rolled into a Roth IRA for the original intended recipient or transferred to another family member.

ESA: Contributions must be made before students turn 18. Funds must be used before age 30, but they can also be rolled over to another ESA for a different family member.

Income Restrictions

529 Plan: There are no income limits for 529 plan contributions.

ESA: Accounts are only available to couples with modified adjusted gross incomes of less than $220,000 (or $110,000 for single filers).

Available Investments

529 Plan: Each program has its own investment strategies. Some offer the flexibility to choose investment portfolios, while others direct funds in a single portfolio.

ESA: You can choose the investments within the ESA portfolio and transfer funds between different investments within the company.

Withdrawal for Non-educational Expenses

For both types of plans, funds withdrawn for non-educational uses are subject to federal tax and a penalty of 10 percent.

Take the Guesswork Out of Saving for College

The best way to ensure you’re making the right investments for your child’s future is to talk with a professional. Connect with a Farm Bureau agent or financial advisor today to talk about education funding options.