Explore the pros and cons of 529 plans and brokerage accounts for college savings. Find out which option aligns best with your financial goals.
Want to get ahead of rising college costs? Smart move. When it comes to saving for education, two options often stand out: 529 plans and brokerage accounts. Each has its own special features that could make it the right choice for your family's college savings strategy.
Think of a 529 plan like a special backpack designed just for college savings - it comes with tax breaks and education-focused benefits. A brokerage account, on the other hand, is more like a multi-purpose bag that gives you more freedom but might not have those same tax perks for college costs.
Let's explore how each option works and find out which one might be your best path to building that college fund.
These specialized savings accounts are designed specifically for education expenses. A 529 plan offers tax advantages to help pay for qualified costs like tuition or books. These plans grow tax-deferred, meaning you won't pay taxes on earnings while the money stays in the account.
States offer two types of 529 plans—prepaid tuition plans and savings plans. Prepaid tuition locks in today's rates at certain schools. Savings accounts grow based on investments, such as mutual funds or stocks.
Anyone can open a 529 and specific states may even offer state tax deductions or credits for contributions to their plan.
Investment opportunities abound with brokerage accounts. They let you buy and sell stocks, bonds, mutual funds, and other assets. These accounts are not limited to education savings—they offer a range of investment options for various goals.
Unlike 529 plans, they do not have tax benefits for education savings. Earnings from investments like dividends or capital gains in these accounts are subject to taxes.
These accounts provide flexibility. You can withdraw money at any time without penalties—though selling investments may trigger taxes. There are no contribution limits, making it easier to save as much as you want.
Brokerage accounts are ideal if you need access to your money before college or want broader choices in how the funds grow over time.
One popular type of brokerage account for children is a UTMA (Uniform Transfers to Minors Act) account. These custodial accounts allow parents to set up investment accounts for minors, giving the money opportunity to grow through various investment options rather than sitting in a low-interest savings account. The assets in a UTMA legally belong to the child but are managed by a custodian (typically a parent) until the child reaches adulthood.
Tax benefits can vary greatly between a 529 plan and a brokerage account—understanding these differences is key to maximizing savings.
Contributions to a 529 college savings plan grow tax-deferred, meaning no federal income taxes on the growth. Withdrawals for qualified educational expenses are completely tax-free.
Many states offer tax deductions or credits for contributions to their state 529 plans, reducing your state income tax bill.
Tax-free growth and withdrawals make 529 plans powerful tools for saving, says financial expert Sarah Dean.
Funds in a 529 plan owned by parents also avoid capital gains tax when used correctly, which brokerage accounts do not offer. These plans help you save more efficiently for college education while keeping extra money working for your child's future.
Unlike 529 plans, brokerage accounts are taxed. Any earnings like dividends or interest from investments in brokerage accounts are subject to taxes yearly. These gains fall under your regular income tax rate or a capital gains tax rate, depending on the type of investment.
Selling investments for profit can trigger capital gains taxes. Short-term gains—on assets held less than a year—are taxed higher than long-term ones. There's no tax deferral; you pay as you earn or sell.
This makes them less tax-friendly compared to savings in a 529 plan.
For UTMA brokerage accounts specifically, the first portion of unearned income (dividends, interest, etc.) may qualify for preferential tax treatment under the "kiddie tax" rules, but substantial investment gains are eventually taxed at the parents' rate until the child reaches adulthood.
Financial aid calculations treat these accounts differently. Money in a parent-owned 529 plan is counted as the parents' asset when calculating federal financial aid, which affects up to 5.64% of its value.
Brokerage accounts owned by parents may still be treated as parental assets but might create higher tax burdens from dividends or capital gains—potentially reducing eligibility for aid more significantly.
A child's brokerage account has an even bigger impact since the FAFSA considers 20% of the student's assets in calculations. This is particularly important for UTMA accounts, which are legally the child's asset and can significantly reduce financial aid eligibility compared to parent-owned accounts.
529 plans offer limited options, often with age-based portfolios and in-state plans. These choices are designed to grow a child's 529 account for education. Account holders can switch funds only twice per year.
Brokerage accounts provide more flexibility. They allow investments in stocks, ETFs, bonds, and mutual funds. Dividends from investments in brokerage accounts may increase savings but are taxable yearly.
UTMA brokerage accounts offer this same investment flexibility, allowing for potentially higher returns compared to traditional savings accounts. The custodian can select from various investment options to help the money grow more effectively for the child's future while maintaining control until the child reaches adulthood.
Investment flexibility matters, but contribution rules set boundaries. Contributions to a 529 plan have no specific annual limit; however, they are subject to the annual gift tax exclusion—$19,000 per donor per beneficiary in 2025.
You can also front-load five years' worth of gifts ($95,000) at once without triggering gift taxes.
Brokerage accounts have no limits on how much you can invest yearly. This allows for more freedom to save or grow money. Unlike contributions to their 529 plans, deposits into brokerage accounts don't provide tax benefits upfront and are taxable upon income earned or capital gains realized.
For UTMA accounts, contributions are considered irrevocable gifts to the minor. While there's no specific contribution limit, the annual gift tax exclusion applies, and larger contributions may require filing a gift tax return.
Withdrawals from a 529 savings plan must be used for qualified education expenses. These include tuition, books, and room and board. If the money is spent on non-qualified expenses, earnings are subject to income tax plus a 10% penalty.
Brokerage accounts don't have withdrawal penalties but lack tax advantages. Any profits are taxed based on how long you held the investments—ordinary income rates for less than a year or lower capital gains rates if held longer.
With UTMA brokerage accounts, an important distinction is that the assets legally belong to the child and must be transferred to them when they reach the age of majority (typically 18 or 21, depending on the state). This means parents lose control over how the money is used once the child reaches adulthood, unlike 529 plans where parents maintain control regardless of the beneficiary's age.
Unused 529 funds aren't lost if college plans change. The money can be redirected to another family member. This includes siblings, cousins, or even parents. Many 529 plans allow you to make changes without penalties.
If no one uses the funds for education, withdrawals face income tax and a 10% penalty on earnings. Though not ideal, the original contributions remain tax-free since they were made with after-tax dollars.
With a UTMA brokerage account, the money belongs to the child regardless of whether they attend college. When they reach the age of majority, they can use the funds for any purpose they choose, which offers flexibility if education plans change but also means parents cannot redirect the funds to another child.
Making the right choice depends on your specific circumstances. A 529 plan is a tax-advantaged investment account that helps parents save for college while benefiting from tax-free growth and withdrawals if used for education expenses. Contributions to a 529 may also offer state tax deductions in some cases.
On the other hand, brokerage accounts allow unlimited contributions and flexible investments but are subject to capital gains taxes on earnings.
Brokerage accounts offer more control over how money is spent—no restrictions like with a child's 529 plan. If your child doesn't go to college, funds in a brokerage account can be used freely without penalties.
For families wanting investment growth but uncertain about whether their child will pursue higher education, a UTMA brokerage account provides a middle ground. It allows the money to grow through investments while maintaining complete flexibility in how the funds are ultimately used, though parents should be comfortable with the child gaining control of the assets at adulthood.
However, investment gains aren't tax-deferred like they are in 529 plans, which could reduce net returns over time. Comparing both depends on factors such as financial goals, flexibility needs, and expected education costs.
Choosing between a 529 plan and a brokerage account for college savings depends on your goals, tax strategy, and flexibility needs.
A Farther financial advisor can help you compare your options, maximize tax benefits, and create a savings plan that works for your family's future.
Start planning smarter—talk to an advisor today.
Both 529 plans and brokerage accounts can help you build a strong college fund - the best choice depends on your specific situation. 529 plans shine when you're certain about saving for education, offering valuable tax breaks along the way. Brokerage accounts give you more flexibility with your money but without those special education tax benefits.
For families seeking growth potential beyond traditional savings accounts, UTMA brokerage accounts offer an alternative that allows for investment growth while maintaining flexibility in how the funds are eventually used, though with different ownership implications than 529 plans.
Consider talking with a financial advisor about which path makes sense for your family's goals and circumstances. The most important step is to start saving early, giving your money more time to grow before those college bills arrive.
A 529 plan is designed specifically to pay for college, offering tax benefits and age-based portfolios. A brokerage account may not have these features but allows more flexible investment options.
Money in a 529 plan grows tax-deferred, and withdrawals used for education are tax-free. In contrast, earnings in a taxable brokerage account are subject to capital gains taxes.
Yes, you can transfer funds from one 529 plan to another or change the beneficiary within your family without penalties.
A parent-owned 529 plan typically has less impact on federal financial aid calculations compared to assets in a standard brokerage account titled under the parents' name.
The benefits of a 529 include potential state tax deductions, no taxes on growth if used for education, and plans that offer automatic investments like age-based portfolios. Brokerage accounts provide flexibility but lack those specific advantages.
No, each state's program varies—some offer better incentives like lower fees or unique investment choices—but you don't need an in-state option unless seeking specific perks tied to residency status.
A UTMA is a custodial brokerage account specifically for minors that allows investment growth but legally belongs to the child when they reach adulthood. Unlike regular parent-owned brokerage accounts, parents cannot maintain control of UTMA funds once the child reaches the age of majority.
