Is it a 529, a brokerage account or a UGMA? We answer that question—and others—about college financing.

We again answer readers’ latest questions on saving and paying for college, with the help of experts.


What’s the best type of account to use when saving for college—a “529,” a brokerage or savings account, or a UGMA?

“If saving for college is the goal, then a 529 plan will usually be the best option for four key reasons,” says Kyle Ryan, a certified financial planner who is head of advisory services at Personal Capital, a digital wealth manager based in San Carlos, Calif.

These state-sponsored accounts, which invest in mutual funds, offer tax-free growth and withdrawals when used for qualified higher-education expenses, Mr. Ryan says. Each state has a plan, and many also offer state-tax benefits to residents who open a local account.

The accounts are controlled by the designated owner and, when owned by a parent, are considered parental assets when calculating financial-aid eligibility, Mr. Ryan says. Fees are typically low, which matters especially over a long period, such as the decades it takes to save for college.

Brokerage accounts offer more investment choices than most 529s. Parent-owned brokerage accounts don’t grow tax-free, however.

As for UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Trusts for Minors Act) accounts, not only are they taxable, but also they’re considered assets of the student for financial-aid purposes, which means the student could receive a lower amount of aid, says Kevin Cox, chief operating officer at Ascensus College Savings, based in Newton, Mass. And unlike 529s, which always are controlled by the owner, UGMA and UTMA accounts become the student’s property when he or she reaches age 18—which means those funds can be used for whatever the student chooses, even if it isn’t college, he says.

The other good thing about 529s is they have “flexibility of investment choices that usually suit both the sophisticated investor and the novice,” and some plans make it easy for family members and friends to contribute money toward a student’s college savings, says Mr. Cox.

A 529 can be passed around among family members, since you’re allowed to change the beneficiary to nearly any relative of the original beneficiary. And while the amount you can contribute is capped, the maximum amount allowed in the account ranges from $235,000 to $500,000, Mr. Cox says.

That may be enough to pay for school and potentially leave some money in the account for a younger sibling or cousin.


Is there a certain age by which you have to distribute funds from a child’s 529 account if you don’t change the beneficiary?

No. There are no beneficiary age restrictions, Mr. Cox says, “so you do not need to distribute the funds at any certain age.”


What is the qualified room-and-board allowance for a graduate student?

Each school publishes its cost of attendance including room and board; this is the maximum you can withdraw from a 529 as a qualified expense. “You’ll have flexibility on where you can live, but you’ll only be able to withdraw up to the amount the school budgets for room and board in its stated costs,” Mr. Ryan says.


Is there any way to set up tax-advantaged college savings plans for unborn children, such as our future great-grandchildren?

Not directly. An account needs the Social Security number of a living beneficiary to be set up. But you can set up an account for another relative, including yourself, and change the beneficiary to a new great-grandchild after the child is born, Mr. Cox says.


I am an American citizen and have grandchildren who are Canadian citizens and live in Canada. Can I participate in the 529 plan for each Canadian child while I live in the U.S. and file a U.S. tax return?

If each grandchild has a U.S. Social Security number or tax ID, then yes, you can set up a 529 account for them even if they don’t live in the U.S., Mr. Ryan says. If not, you won’t be able to do so.


Can I have my parents gift $140,000 to me (representing five years of gifts from two people, for tax purposes) and let it grow tax-free indefinitely with the intention of using it myself to take self-enrichment classes when I retire? If so, is there any restriction on me becoming the owner (and remaining the beneficiary) if they die before I use it?

Yes, you can do this. But note that “it is unlikely that self-enrichment classes would end up costing anywhere near this amount,” Mr. Ryan says. Any money you don’t use for education and later withdraw will be subject to both ordinary income tax and a 10% penalty, but only on the portion of the withdrawal that represents gains.


Can 529 funds be applied to student-loan payments?

It is a frequently asked question, and the answer usually is no. “Student-loan payments are not qualified higher-education expenses,” says Mr. Cox.

There is, however, one exception. According to Mr. Ryan: “The only exception is if the college expense was incurred this year, this same college expense was paid with a loan this year and then a withdrawal was taken from the 529 to pay the loan this year.” It is an uncommon situation, he points out, because a family wouldn’t be likely to take out a loan if 529 funds were available for the student to use.


If a grandparent opens a 529 in his or her name and later enters a nursing home, can Medicaid take that money for the senior’s care?

Don’t expect to use your 529 account to pay off student loans. There is only a limited way that such a use is allowed.
Don’t expect to use your 529 account to pay off student loans. There is only a limited way that such a use is allowed. PHOTO:ISTOCKPHOTO/GETTY IMAGES

This will depend on the state in which you live, Mr. Ryan says. Because the owner of the account—the grandparent—still has access to that money, “some states still consider 529 assets as countable when testing for Medicaid eligibility,” he says.

You can avoid this problem by setting up an account for a grandchild with someone else as the owner (perhaps the child’s parent, which is the most efficient way to set it up for financial-aid eligibility purposes).

You could also change the ownership of a 529 account you’ve already established for a grandchild, but “there could be Medicaid qualifications issues based on the ‘look-back’ rules in Medicaid which can go back up to five-plus years,” Mr. Ryan says.

Ms. Schoenberger is a writer in New York. She can be reached at

Appeared in the September 5, 2017, print edition as ‘What’s the Best College-Savings Account Choice?.’

Source: What’s the Best Account for College Savings?