With the cost of tuition at public universities in Colorado hovering around $35,000 per year (and rising annually), it’s no wonder that saving for college is a top priority for many parents.
According to the Education Data Initiative, more than half of families with a college-bound student have a plan in place to help pay for college, though strategies to accomplish this can vary widely.
Wondering whether to reap the tax benefits of an education-specific plan or invest in a more flexible option? Consider the pros and cons of different saving methods through the lens of NOCO’s financial experts.
The 529 plan
Many financial advisors point parents toward the 529 plan to save for their child’s future. These savings accounts can be used for education-related expenses, including college tuition, room and board, textbooks and technology, trade schools and apprenticeships.
Colorado’s plans allow anyone to contribute up to $19,000 each per year (or “superfund” up to five years at once) without paying state taxes on contributions. Interest earnings and withdrawals are tax-free at both the state and federal level, but there are caveats. Because 529 plans are designed specifically for education, they’re less flexible than other types of savings.
Devin Jones, financial advisor with Macdonald Financial Services in Loveland.
Historically, any funds withdrawn from 529s for purposes other than higher education were penalized, but those rules have eased a bit in recent years, says Devin Jones, financial advisor with Macdonald Financial Services in Loveland.
“The provisions for what you can do with those dollars are much greater than what they used to be,” he says.
Parents can change the beneficiary to another family member, including a sibling, cousin or themselves if they return to school, or they can redirect some of the money into a Roth IRA, provided the 529 is in existence for at least 15 years. They can even use up to $20,000 per year for private high school tuition (tax-free federally, though not at the state level).
Greater flexibility means these savings can be used creatively to avoid tax penalties if a child chooses not to attend college or earns a scholarship, but the potential impact on financial aid—including grants, need-based scholarships and subsidized student loans—is another pitfall.
That’s why Greg Anderson, president of Balanced Financial in Fort Collins, advises his clients to steer clear of 529 plans.
“The problem with 529s is, if you get a financial award from a college, they’ll whittle that down against your known sources of assets, and that includes a 529,” he says. “They know about them and they’re in the federal system.”
He recommends avoiding any investments that show up on the Free Application for Federal Student Aid, otherwise known as the FAFSA, instead directing clients to FAFSA-exempt savings strategies.
Alternative investment options
Anderson’s recommendations include life insurance, annuities and home equity. Withdrawals from these sources aren’t tax-free, but he says they won’t have the negative impact against financial awards that a 529 could.
Another one of his preferred savings tools is the Roth IRA. This traditional retirement account can be used for college costs, he says, provided contributors don’t exceed the income limit ($153,000-168,000 for individuals in 2026, according to the IRS) and they don’t need those contributions to fund their own retirement.
Greg Anderson, president of Balanced Financial in Fort Collins.
Contributions to a Roth IRA can be withdrawn tax-free at any time, for any reason. For families who meet the criteria, this can be a smart way to help cover college expenses.
Some families opt for the flexibility of custodial investment accounts, or Uniform Transfers to Minors Act accounts (UTMAs), which provide a wide range of investment options, including Certificates of Deposit, stocks, bonds, money market funds and more. These accounts can be set aside for college in addition to other expenses down the road, such as purchasing a car or making a down payment on a home.
Because UTMAs are opened under the minor’s name, Anderson says they are considered student-owned accounts on the FAFSA. He cautions parents that student-owned assets are assessed at 20 percent against a student’s financial aid award, while parent-owned assets, like Roth IRAs and life insurance, are assessed at just over five percent. Like with 529s, Anderson says this can mean a dramatic decrease in aid.
Despite their convenience, these accounts come with significant drawbacks.
“The moment you put an account in a child’s name, you’ve made a gift,” Anderson says. “Once they turn 21, they own that money, and they can go spend it on whatever they want, no strings attached.”
What’s best for your family?
The best route, according to both advisors, is to evaluate the likelihood that your child will attend college and adjust your savings strategy over time.
“The world is changing, and college isn’t the best route for everybody,” Anderson says. “Think about what jobs will exist in a decade or two. Will they require college? A certificate? On-the-job training? Think about what you’re saving for and how much flexibility you’ll need.”
While Anderson prefers flexible savings options such as life insurance and home equity, Jones recommends a blended approach.
“If you’re fairly convinced your child will go to college, you should utilize the 529,” he says. “But be open-minded and prepare for other expenses with a UTMA or other kind of account as well.”
The two agree that setting money aside for your children’s future is important, and that $100,000 per kid is a strong target to aim for over time.
“You’re not trying to solve the whole problem, just take a middle-of-the-road stab at it,” Anderson says. “$100,000 might not fund everything, but it’s a darn good start.”
Jones says starting early is the key to maximizing the benefits of compound interest but warns parents not to fall into a common trap: funding a plan initially, then forgetting about it for years.
“Don’t forget about this expense coming up down the road,” he says. “Even as little as $25 per month saved in a 529 or UTMA is money you’re going to be very happy to have later on.”
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5 Tips From the Pros
“Save on your undergrad,” Anderson says. “Freshman physics at Harvard is exactly the same as freshman physics at CSU.”
Don’t write off out-of-state schools. Jones says these institutions often offer better scholarship packages than in-state options.
Remember that college isn’t the only path. Anderson recommends the book, “Debt-Free U” by Zac Bissonnette, which tackles the tough questions when it comes to deciding whether college is right for your child, and if so, where to go and how to pay for it.
Explore studentaid.gov for a full breakdown of how different assets are weighed on the FAFSA.
When it’s time to apply for college, encourage your student to fill out the FAFSA, even if they don’t think they’ll qualify for aid. This opens the door for federal, state and institutional awards, including grants, work-study jobs, scholarships and loans.
