More Than One Kid? How to Save for College

A reader named Autumn asks a good question:

“Hi, I need some advice… My sweet newborn was given a little over $1,000 from our family for his higher education. I thought about putting it into a 529 plan, but I don’t want this money to be only in his name since we plan to have more children, and we would like all the money to be in an account that any of our children can use. If child #1 gets a full ride or decides not to go to college, then we want the money to be used for child #2. I would like something that can earn some sort of interest as well. Any ideas?”

Thanks for your question, Autumn. Here’s a quick look at possible options for you (also check out our guide to saving for college):

529 Plans

Most states offer tax-advantaged 529 college savings plans, and many of them do allow you to transfer funds to a different beneficiary if your child doesn’t end up going to college or doesn’t need all of the money. The funds still must be used for education-related expenses.

  • Pros: Tax-free investment gains; usually transferable to other kids; contribution limits tend to be very high.
  • Cons: Can be subject to stock-market volatility; can incur tax penalties if the money isn’t used for education.

Roth IRAs

Another option is a Roth IRA, which behaves in a similar way to a 529 plan: You contribute money after taxes, and are able to withdraw it later without paying taxes on the gains. But a Roth IRA is more flexible: You can use the money for retirement, a down payment on a house, or qualified educational expenses (after 5 years). However, the income and contribution limits are much lower than for most 529 plans.

  • Pros: Tax-free investment gains; flexible withdrawals (can be used for retirement past age 59 1/2, or a down payment, or education); doesn’t count toward child’s financial aid application.
  • Cons: Strict contribution and income limits; can be subject to stock-market volatility.

Coverdell Education Savings Account

  • Pros: Tax-advantaged if used for educational expenses; considered the parent’s asset so it won’t affect child’s financial aid; can also be used for K-12 education expenses.
  • Cons: Contribution limit of $2,000 per year; if you’re earning more than $95,000 per year or $190,000 as a couple, you might not be eligible; if your child doesn’t use the funds by age 30, withdrawals can be subject to taxes.

Prepaid Tuition Plans

  • Pros: Prepaid tuition plans lock in college tuition at current prices; usually exempt from federal taxes.
  • Cons: While some plans offer a refund if your child chooses an out-of-state college or doesn’t go to school, some may not, so be sure to fully understand your state’s plan.

UGMA and UTMA Custodial Accounts

  • Pros: At age 18 or 21, your child can use this for whatever he or she would like, so if they decide not to go to college or get a scholarship, they can use it for something else without paying penalties.
  • Cons: These accounts offer fewer tax benefits; they can be considered your child’s asset, which can reduce the amount of financial aid they receive; and your child can use it for whatever he or she wants… that could be college, but it could also be a really fast motorcycle.

Basic Savings Account

  • Pros: Generally requires a small minimum balance, so you can start saving without a large amount; you are likely free to withdraw and deposit funds as you please without facing fees or penalties; funds are FDIC insured.
  • Cons: Your interest rate can fluctuate, and you will generally earn much less interest than other savings or investment accounts.

High-Yield Savings Account

  • Pros: A high yield savings account will earn you a higher interest rate over a standard account; it is often insured.
  • Cons: Minimum balance requirements; may be limits on withdrawals or deposits.

Certificate of Deposit (CD)

CDs offer higher interest rates that are generally locked in for a certain amount of time. So if you’re saving for your children and you still have a few years until they’re college bound, you might be able to score a higher rate by putting the money in, say, a five-year CD.

  • Pros: Can offer a higher interest rate than a savings account; FDIC insured.
  • Cons: Can incur fees and penalties if you withdraw money before your set time period ends.
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