Should You Use a 529 Plan or ESA to Save For College?

It seems as soon as our children are born, we’re planning for their future. Without being able to see eighteen years ahead, how can we know for sure what we’re up against and save accordingly? In this series, we’re going to break down saving for college one phase of life at a time.


Ask the right questions.

But your child hasn’t even settled on a favorite color, much less a life path. It leaves a lot of parents wondering where to start. Don’t worry—you’re not picking in-state or out-of-state, or declaring a major just yet. To start the conversation about college before school enrollment age, you just need to establish a direction based on your expectations.

Is college an expectation that both parents have for your child?

 Are the parents covering it all?

 Will the children help pay for some or all?

 Will you need loans?

These questions can be difficult to navigate because the options are as varied as the students that will eventually use the funds. College Planning Services can act as a great starting point to guide your conversations about the future. You can equip yourself with the tools to determine if you’re going to be saving to send your child on a fully funded trip to an ivy league school, or if you’re willing to sponsor their way through a four-year education with the promise that they’ll pay their own room and board.

The offering of every college is unique, but that doesn’t make it impossible to know what neighborhood of price tags you’re aiming for. Using resources like university comparisons or cost calculators, you can narrow down your bottom line with criteria like your current household income and the state you currently live in.

None of the decisions you make now will seal your child’s educational fate, but starting from somewhere will help you feel secure that when the time comes for the decision to be made, you’ll be able to give them the flexibility to not be held back by the price.


Set up the right accounts.

A piggy bank, while an adorable addition to any nursery, isn’t going to give you the return on investment that will make a dent in your child’s college savings when the time comes. A 529 or College Savings Account, however, will. 529 Plans and Education Savings Accounts are both geared specifically towards your child’s financial future.

A 529 Plan 

Is earmarked for education

While withdrawal on a 529 is possible under certain conditions, this account is designed for education only. Savings from a 529 plan can be applied to tuition, textbooks and school supplies at any accredited higher education institution in the US. Money can also be used for student housing, room and board

Grows through contributions

In addition to the primary donors (the parents, most likely), other family members, godparents or even exceptionally generous neighbors can all add money to a 529; either regularly or for special occasions like birthdays or holidays. As the account grows, the primary donors can change their contribution easily.

Belongs to the donor

The money contributed belongs to the donor, not the beneficiary, until the time of payout for the education. This is helpful in the case that your child applies for federal aid once they come of age.

Poses potential tax benefits

The distributions for your child’s school costs are tax exempt. Plus, a lot of states will grant benefits to the account donors on state income tax. The assets grown aren’t counted in the gross estate for estate tax.

Applies to everyone

Nearly everyone is eligible for a 529 Savings Plan, because there aren’t income or age restrictions on the accounts. However, you’ll reap the greatest payoff by starting one when your kids are young and haven’t started school yet.



An Education Savings Account (ESA) 

Is earmarked for education

Just like the 529, savings from an ESA plan can be applied to education from primary school through college or vocational schooling.

Can accept more investment options

529 Plans have a limited number of investment options, but ESAs follow the rules of IRAs, which mean they can allow stocks, bonds and mutual funds.

Poses potential tax benefits

The tax benefits are nearly identical to that of a 529, meaning contributions and distributions are tax-exempt and there’s a potential for income tax breaks.

Belongs to the donor

Both a 529 and an ESA belong to the donor, and beneficiaries can be added or changed with no penalty.

 Has more restrictions

There are also more caveats attached to an ESA than to a 529. You can contribute up for $14,000 a year into a 529 but only $2,000 into an ESA. The money also must be used by the time the beneficiary turns 30, or you risk penalty



Every savings option has its own benefits and risks to the account holder, so while it’s great to do your own research, it’s also smart to seek out the advice of a certified professional who can look at your specific and unique financial situation. They can help you set up the right account type for your needs.

Save the “right” way.

Remember, the only “wrong” way to save for college is to not save at all. And while even then, there are still aid options (which we’ll cover in a later in this series), the most surefire way to secure funding for the future is to create it yourself.

The College and Career Planning team at CommunityAmerica Credit Union is a 2018 National Parenting Products Award winner. In addition to college planning help, CommunityAmerica provides a full suite of financial products, including checking, savings, mortgages and a variety of loan products to meet consumer and business needs. As a not-for-profit financial institution, CommunityAmerica offers highly competitive rates on deposits, loans, and fewer, lower or no fees at all. For more information, visit

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