Is a 529 Plan Really Your Best Option?

Episode 356 – 529 plans are certainly popular these days, and with good reason: high contribution limits and potentially tax-free growth. But they’re not for everyone. Here are four other potential alternatives for funding a college education.

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Hello, this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, is a 529 plan really your best option?

Over the years, 529 plans have become a popular method for parents financing a college education. That’s understandable. The money in a 529 plan grows on a tax-deferred basis. And you can take the money out tax-free, assuming it goes towards “qualified expenses.” Qualified expenses include tuition for college, as well as for elementary, middle, and high schools. They also include things such as room and board, computers and related equipment and services, as well as required textbooks.[1]

College expenses these days are undeniably high. According to U.S. News and World Report, the average cost of tuition and fees to attend an in-state public school is $11,371 for 2025, while the average for a private school is $44,961.[2] But the lifetime maximum limit that you can put into a 529 plan is pretty high as well, ranging from $235,000 to $550,000, depending on the state.[3]

But is a 529 plan always the best choice? Not necessarily. Some people are just uncertain about their child’s future education plans, or whether they’ll even go to college or not. If they do, a substantial scholarship is always possible. In addition, some people are also uncomfortable with the idea of locking up a significant amount of their money into a 529 plan.

But there are other alternatives that may be of interest to parents who may be hesitant about using a 529 plan. In a recent article in The Wall Street Journal, author Cheryl Winokur Munk talks about four additional possibilities:[4]

1. Taxable Investment Accounts. The big reason why these may work better for some individuals is that they are completely flexible. You can put in as much as you want or can afford, and you can invest it pretty much wherever you want. But it comes with some drawbacks. For one thing, you’re giving up the tax-deferred growth aspect of a 529 plan. For another, having a significant taxable investment account might make it more difficult to qualify for financial aid, particularly if the account is in the child’s name.

2. Roth IRAs. Surprisingly, a Roth IRA can be used for education expenses, but it’s tricky. If you’re using a retirement account for college, you’d better make sure you have addressed your retirement planning somewhere else. There are also contribution limits—$7,000 per year, or $8,000 per year if you’re age 50 and older—and income limits. The income limits begin at $150,000 for a single taxpayer, and the ability to contribute to a Roth is completely phased out at $165,000 and above. For a married taxpayer, the limit begins at $236,000, and the ability to contribute to a Roth is completely phased out at $246,000.

But if you want to use a Roth IRA for education, your contributions can be withdrawn at any time without taxes or a penalty. Your earnings within the account can come out tax-free as well if used for qualified education expenses, assuming the account has been open for at least five years.[5]

3. UGMA Accounts. Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are set up by a parent for a minor beneficiary. These accounts allow an adult to make irrevocable gifts to a minor, usually their child. The parent manages the account as the custodian until the child reaches the age of majority in their state. The child takes control of the account at that point. UGMA and UTMA accounts have a bit more flexibility than a 529, as they have no contribution limits and aren’t restricted just to education expenses.

These accounts are taxable, but there may still be some income tax benefits. Current tax laws allow some of the accounts’ earnings to be taxed at the child’s (presumably lower) tax rate. The downside is that such accounts may have a significant negative impact when it comes to qualifying for financial aid.[6]

4. Whole Life Insurance. Some people prefer to use whole life insurance to help cover education costs. They will purchase a whole life insurance policy, either on themselves or their child, and then borrow against the policy’s cash value to help pay for college.

This type of arrangement comes with a potentially significant benefit: your life insurance policy is generally not counted as an asset on the Free Application for Federal Student Aid (FAFSA), which is what most colleges use to determine your eligibility for financial aid.[7] In other words, unlike the first three options we’ve discussed, life insurance generally does not hurt your eligibility for aid, regardless of whether it’s you or your child who is the insured.

Another, perhaps obvious benefit of using life insurance, is that should something happen to you, the death benefit may be available to fund your child’s college expenses even if you’re no longer there.

Keep in mind that life insurance is something that you have to qualify for both physically and financially. Also, when you’re planning on using life insurance for education, it’s important to make sure to aggressively fund the policy as your children grow up, so that there will be enough available cash value when the time comes to pay for college.

 

A 529 plan is a potentially excellent way to fund a higher education. But it’s not the only way. Perhaps a combination of several different strategies might work well for some of us. You just need to know your options.

[1] Fidelity Viewpoints. “How to spend from a 529 college plan.” Fidelity.com. https://www.fidelity.com/learning-center/personal-finance/college-planning/college-529-spending (accessed September 29, 2025).

[2] Wood, Sarah. “See the Average College Tuition in 2025-2026.” U.S. News & World Report. https://www.usnews.com/education/best-colleges/paying-for-college/articles/paying-for-college-infographic (accessed September 29, 2025).

[3] Winokur Munk, Cheryl. “The Pros and Cons of Four Alternatives to ‘529’ Plans for College.” wsj.com. https://www.wsj.com/personal-finance/529-plans-college-savings-alternatives-tips-958b2556 (accessed September 29, 2025).

[4] Id.

[5] Fidelity Viewpoints. “How to spend from a 529 college plan.” Fidelity.com. https://www.fidelity.com/learning-center/personal-finance/retirement/roth-ira-5-year-rule (accessed September 29, 2025).

[6] Winokur Munk, Cheryl. “The Pros and Cons of Four Alternatives to ‘529’ Plans for College.” wsj.com. https://www.wsj.com/personal-finance/529-plans-college-savings-alternatives-tips-958b2556 (accessed September 29, 2025).

[7] Mutual of Omaha Insurance Company. “How to Use Whole Life Insurance for College Savings.” Mutualofomaha.com. https://www.mutualofomaha.com/advice/life-insurance/understanding-life-insurance/whole-life-insurance-for-college-savings (accessed September 29, 2025).

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