Three popular college savings accounts and how they work

If you’re a parent, you’ve probably already felt a little sticker shock just thinking about future tuition bills — and with good reason. 

By the time today’s toddler starts college, tuition at a private university could exceed $100,000 per year — totaling more than $400,000 for a four-year degree. Even in-state public universities could reach nearly $200,000 for four years by 2045, based on National Center for Education Statistics data and conservative Bureau of Labor Statistics inflation estimates. 

These are big numbers, but it’s not unbeatable. With strategic financial planning and the right college savings accounts, you can take steps now to prepare — and possibly save money in ways that benefit both you and your family. 

In this article, we’ll break down three college savings accounts — the 529 plan account, a Roth IRA and a high-yield savings account — and help you decide which account or mix of accounts might work best for your goals. No matter which approach you’re considering, Empeople Investment & Retirement Services can help guide your investment decision based on your unique needs and timeline. 

529 college savings plan: A popular option for good reason 

A 529 plan account is one of the most widely used education savings tools — more than $525 billion has been invested across nearly 17 million open 529 accounts nationally — primarily because of its tax benefits. These state-sponsored plans offer major tax advantages: Earnings grow tax free, and withdrawals aren’t taxed when used for qualified higher education expenses at public, private or religious schools.* 

How 529 savings plans work 

You contribute after-tax dollars and invest them in a portfolio, often made up of mutual funds or age-based options that automatically adjust as your child gets older. The money has the potential to grow over time, and as long as it’s used for qualified education expenses — tuition, room and board, books, school fees — withdrawals are federal and state tax free. Rules have been relaxed recently, allowing you to use the funds for K-12 tuition and registered apprenticeship programs as well.* 

Why families choose 529s 

• High lifetime contribution limits — often over $500,000 per beneficiary 
• Low impact on financial aid/scholarship funds since accounts are considered parent-owned assets 
• Anyone can contribute, including grandparents, relatives, and friends 
• Many states offer tax deductions or credits for contributions* 
• Contributions qualify for the federal gift tax exclusion — up to $18,000 per year per child ($36,000 for couples)* 
• Accessible entry points, with many plans starting at just $10 or $25 

Drawbacks of 529s 

• Non-qualified withdrawals are subject to income tax and a 10 percent federal penalty on earnings 
• Investment options vary by plan, so fees and returns can differ 
• Unused funds can be difficult to repurpose unless transferred to another qualified family member 
• Limited flexibility compared to other savings vehicles if plans change 

While 529 college savings accounts are managed by states, you don’t have to go with what your home state offers. It’s worth having a conversation with an investment advisor who can help you compare 529 plan accounts, understand your options, and make a choice that supports your family’s long-term goals. 

Roth IRA: A flexible option with long-term benefits 

Roth IRAs are primarily designed for retirement, but they can also be used as a college savings account for qualified higher education expenses. Because you contribute after-tax income, your money grows tax free* — and you can withdraw your contributions (but not your earnings) at any time, for any reason. 

How Roth IRAs work as a college savings account 

If you use Roth IRA funds for qualified higher education expenses, you can withdraw earnings early without the 10 percent penalty.* While those earnings will still be taxed as income, you won’t be hit with an additional fee. Contributions are always available tax free and penalty free. 

Why families consider Roth IRAs 

• Dual-purpose: save for college and retirement 
• Contributions can be withdrawn at any time 
• No penalty on qualified education withdrawals 
• No financial aid/scholarship funds impact until funds are withdrawn 
• Unused money stays invested for your future 

Drawbacks of Roth IRAs 

• Contribution limits apply*
• Income restrictions may limit eligibility 
• Earnings used for college are still taxed as income 

If flexibility matters to you or if you’re balancing education savings with retirement goals, a Roth IRA might be worth exploring. A trusted advisor can walk you through the investment objectives, risks, charges and expenses and help you decide whether it’s the right fit for your financial picture. 

High-yield savings account: A simple, low-risk place to start 

If you’re just getting started with college savings, are risk-averse or value having a no-strings-attached college savings account, a high-yield savings account can be a smart choice. These accounts typically offer much better rates than traditional savings accounts, helping your money grow with little effort or risk. 

How high-yield savings accounts work 

These accounts are FDIC or NCUA-insured and earn dividends on your balance. There’s no investing involved, so your money isn’t exposed to market swings, and it stays fully accessible whenever you need it. That makes them especially useful for families who want to save without locking up funds or navigating stock market volatility. 

Why families consider high-yield savings 

• Easy to open and manage, often with no fees 
• Fully liquid — withdraw anytime without penalty 
• No contribution limits or tax reporting headaches 
• Accessible for all savers — no income restrictions 
• Higher upfront contributions can generate meaningful dividends over time 

Drawbacks of high-yield savings 

• No tax advantages — dividends earned are subject to income tax 
• Raes can fluctuate based on the market 
• Slower long-term growth compared to investment-based options 
• May lose value to inflation over time 

While a high-yield savings account isn’t a complete education savings solution on its own, it can be a helpful part of your overall strategy. A trusted advisor can help you decide how to pair it with longer-term options like a 529 plan account or Roth IRA based on your timeline and goals. 

Choosing the right college savings account for your family 

The cost of college may be ever rising, but with the right savings strategy, it doesn’t have to feel out of reach. Today’s college savings accounts offer flexible ways to plan ahead, no matter your income, timeline or comfort with risk. 

If you’re unsure which option makes the most sense for your family, Empeople Investment & Retirement Services advisors can help you compare your options, make wise investment decisions and build a plan that works for your goals. 

Starting early, saving consistently, and choosing the right mix of tools can make a big difference. You don’t have to do everything at once. You just have to get started. 

*Tax laws are subject to change. Contact a tax advisor for more details.