To help you choose the best college savings option, here's how each plan stacks up in the categories that matter most.
529 COLLEGE SAVINGS PLAN
Maximum contribution:
Annual: Typically, none. But gift tax laws are in flux, so check them before you make a donation of more than $13,000 per person.
Lifetime: As much as $300,000 in many plans.
Tax treatment:
Federal: Tax-deferred growth, tax-free withdrawals for college expenses.
State: Many states provide tax benefits to residents using their plan.
Financial aid impact: Maximum of 5.64% of value will count against you.
Restrictions on withdrawal and spending: Withdrawals must cover qualified higher education expenses.
Potential problems: Limited investment options. Some states funds have comparatively high expense ratios.
529 PREPAID TUITION PLAN
Maximum contribution:
Annual: Typically, none. But gift tax laws are in flux, so check them before you make a donation of more than $13,000
Lifetime: Up to $220,000 in some plans
Tax treatment:
Federal: Tax-deferred growth, tax-free withdrawals for tuition.
State: Many states provide tax benefits to residents using their plan.
Financial aid impact: Maximum of 5.64% of value will count against you.
Restrictions on withdrawal and spending: Withdrawals only cover tuition.
Potential problems: Some plans are facing financial difficulties and may not have the funds to meet their obligations.
PERMANENT LIFE INSURANCE
Maximum contribution: None.
Tax treatment:
Federal: Tax-free access to the cash value of your policy.
Financial aid impact: These assets are not counted against you in financial aid.
Restrictions on withdrawal and spending: None.
Potential problems: High fees for withdrawing money within the first few years.
ROTH IRA
Maximum contribution:
Annual: $5,000.
Lifetime: Depends on income.
Tax treatment: Federal: Tax-deferred growth, and tax free withdrawals after you turn 59-1/2. Contributions can be withdrawn tax-free if used for college.
Financial aid impact: These assets are not counted against you in financial aid.
Restrictions on withdrawal and spending: None (10% early withdrawal penalty waived for qualified higher education expenses).
Potential problems: Earnings are subject to income tax and withdrawals can impact future financial aid eligibility.