If you have children, grandchildren, or other children you care about in your life, one of the biggest financial gifts you can give them might be contributing towards their college education. With the costs of college and university tuition on a consistent rise, the sooner you start planning and investing, the better.
But what kinds of accounts should you be utilizing to make the most of your contributions? And how much should you be setting aside to ensure they have enough to get them through their college years?
Here, we’ll cover how you can get started with college savings and review the three most popular types of accounts that you can use, including 529s, ESAs, and custodial accounts.
Whether your child is a newborn or just a few years from high school graduation, these strategies can help you fund education without derailing your own financial goals.
When Should You Start Saving for College?
The best time to start saving is the day your child is born—or even before, if you’re planning ahead.
The second-best time? Today.
Starting early gives your money time to grow. That’s the magic of compound interest: small, consistent contributions can snowball over time into something much more substantial.
For example, let’s say you save $200 a month starting from your child’s birth. With an average annual return of 6%, you could have over $70,000 by the time they head off to college. Start that same plan at age 10 instead, and you’re looking at around $23,000—not nothing, but a significant difference.
But what if your child is already older, and you haven’t saved a dime yet?
Take a deep breath—there’s still hope. While compounding may not be on your side anymore, other strategies are:
- You can still open and contribute to tax-advantaged accounts like 529s.
- You might shift focus to a shorter-term savings plan or set aside part of your income to help with tuition later.
- You can involve your child in the process—by encouraging scholarships, work-study programs, or community college as a starting point.
It’s never too late to take action, and every dollar you save now is one less your child may have to borrow later
How Much Should You Save to Cover Their College Costs?
As you may have already guessed, there’s no one-size-fits-all answer to this question. College costs vary widely depending on the school, whether your child stays in-state or goes out-of-state, attends a private university or a public one, or starts at a community college.
One place you can start to estimate a savings goal is choosing two or three potential schools you have in mind and then researching their current tuition costs.
In addition to the current cost of tuition, you’ll also want to factor in annual increases, which have typically averaged 4-5% per year.
The chart below shows the average projected annual college costs for a public and a private college, based on the CollegeBoard’s Trends College Pricing, assuming a 5% inflation rate:
Once you have a ballpark figure of the annual cost of your chosen schools, you can reverse-engineer your savings plan: how much per month would help you reach that number by the time your child turns 18? You can also have a financial advisor help you do the math and build these savings into your overall financial plan.
Even if you fall short of the full amount, remember that every bit helps, and the gaps can often be filled in through loans and scholarships.
Now, what kind of college savings account type would be best to contribute money into?
The 3 Most Popular College Savings Options: 529s, ESAs, and Custodial Accounts
Choosing where to save is just as important as how much you save. There are several types of accounts you can use for college savings, and each has its pros, cons, and specific use cases.
Let’s walk through the most common college savings account options: 529 Plans, Coverdell Education Savings Accounts (ESAs), and custodial accounts (UGMA/UTMA).
1) 529 College Savings Plans
529 plans are often the go-to for college savings—and for good reason. They’re designed specifically for higher education expenses and come with several tax advantages.
How does a 529 savings plan work?
When you open a 529 account in your state, you contribute after-tax dollars to the account. This allows the money to grow tax-deferred through investment vehicles of your choice within your state’s 529 plan.
When you withdraw the funds for qualified education expenses—like tuition, books, room and board, or even student loan repayment up to a limit—those withdrawals are completely tax-free.
Key benefits of 529 plans:
- High contribution limits: Each state has its own contribution limit for how much you can put into the plan for each beneficiary. In 2025, the aggregate limit for the Florida 529 plan, for example, is set at $418,000 per beneficiary over the life of the account.
- Minimal impact on financial aid: Because the account is owned by the parent, it typically counts less against financial aid eligibility.
- You stay in control: Unlike custodial accounts (which we’ll touch on shortly), the child doesn’t gain control of the account at age 18 or 21.
- Some states offer tax deductions or credits for contributions if you use your home state’s plan.
Things to consider with 529 plans:
- Funds must be used for qualified education expenses—otherwise, earnings are subject to income tax and a 10% penalty.
- Investment choices are limited to what the plan offers, although many have age-based portfolios that adjust over time.
- 529 plans can also be used for K–12 tuition, but only up to $10,000 per year, per student.
Pro tip: You’re not required to use your state’s 529 plan, so it pays to shop around for one with low fees and good investment options.
2) Coverdell Education Savings Accounts (ESAs)
Similar to 529 plans, Coverdell ESAs also offer tax-free growth and withdrawals for qualified education expenses, but they’re a bit more restrictive than 529s in terms of contribution limits.
Coverdell ESAs also allow you to use funds for K–12 expenses, not just college, which can be useful for families considering private elementary or high school education.
Here’s what you should know about Coverdell ESAs:
- The annual contribution limit is just $2,000 per child.
- To contribute the full $2,000, your modified adjusted gross income must be under $190,000 (married filing jointly).
- Contributions must stop when the child turns 18 (age 30 for special needs recipients).
- Funds must be used by age 30 or rolled over to another eligible family member.
That said, ESAs offer more investment flexibility than most 529s. You can invest in a wider range of mutual funds, stocks, or ETFs to increase your chances of optimizing your returns.
ESAs can be a helpful supplement to a 529 plan to further boost college savings, but on their own, probably aren’t enough for most families.
3) UGMA/UTMA Custodial Accounts
Another type of account that parents often use to save for college is a custodial account like UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act). UGMA and UTMA accounts are custodial accounts that hold assets for a minor until they reach adulthood.
Unlike 529 plans or Coverdell ESA accounts, custodial accounts aren’t limited to education expenses. The money can be used for anything that benefits the child—education, a car, even a down payment on a house.
Benefits of UGMA/UTMA Accounts:
- No contribution limits
- Wide investment flexibility
- Can be used for non-education goals
Drawbacks of UGMA/UTMA Accounts:
- The child gains full control of the account at the age of majority (usually 18 or 21 depending on the state), and they can spend it however they like.
- Investment earnings are taxed annually. Earnings above a certain amount may be subject to the “kiddie tax.”
- Custodial accounts can reduce financial aid eligibility more than a 529, because the assets are considered to belong to the child.
The biggest difference between using a custodial account vs a 529 plan for college savings is that the money in the custodial account doesn’t grow tax-free since you have to pay taxes on earnings along the way. However, you do not pay any extra tax upon taking out the money that you put into the account since it’s already contributed as after-tax funds.
For families looking to build a broader nest egg for their child—not just a college fund—UGMA/UTMA accounts can play a helpful role.
What If You’re Starting Late?
If your child is already in middle or high school and you haven’t saved as much for their college as you’d like, here are some options to consider to get caught up:
- Open a 529 anyway. Even a few years of tax-deferred growth is better than none. You can contribute during college, too.
- Ramp up contributions. Temporarily cutting back on discretionary expenses to redirect funds into a college savings plan can make a meaningful difference.
- Use cash flow to pay as you go. Many families cover part of tuition with current income. If you’re in your peak earning years, this can work in your favor.
- Get your child involved. Encourage them to apply for scholarships, work part-time, or attend community college for two years before transferring to a four-year school.
Every dollar saved is a dollar that doesn’t need to be borrowed—with interest.
Build a College Savings Plan That Works for Your Family
Whether you’re starting when your child is two days old or 12 years old, the key is to take a step forward today. Start by choosing the college savings account type that fits your goals and financial situation. Then, select your investments based on your time horizon and set up automatic contributions into the account every month, quarter, or year.
And don’t forget to review your college savings plan every year to make adjustments as needed.
Need help figuring out which savings option is right for your family?
Our local financial advisors in Tampa will be happy to help you design a personalized college savings plan that fits your goals, your budget, and your timeline. Schedule a complimentary call today.
