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Using a 529 Plan vs a Savings Account for College

529 Plan vs Savings Account Compared
Nancy Bilyeau
Nancy BilyeauUpdated April 7, 2023
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With college costs for public institutions increasing by over 75% each decade since the 1970s, it’s never been more important for parents to find ways to put aside money for their children’s education. And for that money to grow.But how to do that during a time of inflation? It’s a stressful question. One 2022 survey found that 66% of parents with kids aged 16-18 planning to go to college are worried about paying for their child’s education.Right now some people favor a 529 Plan as a source of money for college education, while others think a savings account works best for them. Read on to learn more about the 529 Plan vs. Saving Account.Recommended: Guide to the Price of College Over Time

What Is a 529 Plan?

When you’re filling out the FAFSA form and you and your child are reviewing scholarships and grants, the funds you can contribute to paying for college are obviously of great importance. This is when a 529 Plan will bear fruit. So what is it?A 529 plan is an investment account that offers you tax benefits at the same that it pays for the tuition and related college expenses (room and board and books) of your child or another designated beneficiary. There are two ways to go with the 529 plan: a savings plan and a prepaid tuition plan. 

529 Savings Plan

Savings plans allow you to make tax-free investments and withdrawals, as long as you’re using the money to pay for qualified educational expenses. It works like a Roth IRA. You submit after-tax dollars and invest them in mutual funds or other investments. Your savings increase or decrease depending on investment performance. 

529 Prepaid Tuition Plans

Prepaid tuition plans let you pay tuition ahead of time at participating public colleges at today’s rates. You won’t have to pay more in the future when your child goes to college, even if tuition increases.

How 529 Accounts Work

Every state offers its own 529 plan. However, you’re not limited to the plan offered by the state where you live. You can choose another state’s plan. Remember that opting for your own state’s plan could make you eligible for certain tax deductions or credits. You make the contributions to the 529 on a monthly or annual or other basis. The investment grows on a tax-deferred basis. The money is withdrawn tax-free as long as it is money to pay for qualified education expenses. In some situations, you can use the 529 money to pay student loans.Also, you can’t deduct these contributions from your federal income taxes. However, more than 30 states offer state income tax deductions and state tax credits for 529 plans. This is why it matters if you select your own state’s 529.Once you’re ready for the withdrawal from the 529 plan, contact the plan administrator, make a request online, or submit a request form. The administrator can send withdrawals by check to the account owner, the beneficiary, or the school. Some plans may allow you to make a payment directly from your 529 account to a landlord or other eligible third party.Recommended: Guide to Education Savings Accounts

Pros and Cons of 529s

There are distinct benefits to a 529 but also some drawbacks.


The tax benefit makes it a clear advantage. The investment grows tax-free and this can save you money over time.Unlike some of the alternatives, a 529 Plan usually has a high contribution limit. Many plans allow you to contribute at least $200,000 over the lifetime of the account.Also these funds have some flexibility in use. You can spend the money on tuition, room and board, and books. And if your child decides not to go to college, the fund can be re-deployed to another family member, even yourself if you go to graduate school.


Your investment options may be limited with a 529 Plan. You won’t be able to select specific stocks or bonds. And a downturn in the stock market could hurt the account, especially in the period of time close to when you plan to tap the funds.If you have no one to give the money to after a child decides against college and you withdraw the money for non-qualified expenses, you could be hit with penalties and taxes. It could reach 10% of the earnings potential of the withdrawal.Recommended: Guide to Taxes on Savings Accounts

Pros and Cons of Savings Accounts

Savings accounts can be used to help pay for college. There are distinct advantages, but also big downsides.


One of the chief advantages to a savings account for college is easy access to the funds. Unlike a 529, you can withdraw the money at any time and not suffer a penalty.These accounts are low risk. You won’t take a blow from a stock market downturn right before your child needs to start paying for college.And there is no contribution limit to how much you put in the savings account.


There are few if any tax benefits to a savings account used for education. The money will not grow as quickly as it would in a Roth IRA or in other types of accounts. In fact, inflation could erode the value of a savings account over time.The accessibility of the savings account, especially when compared to a 529 Plan, is also a drawback. The temptation exists to withdraw money from a savings account for other reasons, depleting the college-education fund. Recommended: How Much Money Should You Have Saved at Each Age?

The Takeaway

529 Plans present an advantageous opportunity to save for your child’s education. You will have tax breaks and flexibility in withdrawal options. However, the money must go to education—for a child or yourself—or you will pay a penalty. There are no such penalties with a savings account, but the account is unlikely to grow as much as a 529 plan either.

Student Loan Tips

  1. Once the pandemic-related pause on federal student loan payments ends, going back to making payments may be hard on budgets. One solution is to refinance to a lower interest rate, longer loan term, or both, depending on your situation. (The tradeoff is that you’ll be forfeiting federal benefits such as repayment programs.) Find and compare your student loan refinance options.
  2. Paying extra each month on your student loan can reduce the interest you pay and so lower your total loan cost over time. (The law prohibits prepayment penalties on federal or private student loans.)
  3. Depending on their income, qualified borrowers can deduct the interest they pay for student loans, both federal or private, up to $2,500 per year. The deduction phases out for modified adjusted gross incomes of $70,000 to $85,000 for single individuals and $145,000 to $175,000 for people married and filing jointly.

Frequently Asked Questions

What are the disadvantages of using 529 accounts?
What happens to a 529 plan if your child doesn't go to college?
Is a 529 or a traditional savings account better?
Photo credit: iStock/Snezhana Kudryavtseva

About the Author

Nancy Bilyeau

Nancy Bilyeau

Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.
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