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Personal finance

Account types you might want to avoid

Many types of accounts can be used to save for college, but some of them may not be the best options. Here's what you should know.
6 minute read

Using a Roth IRA for college

A Roth IRA is typically used to save for retirement. It's different from a traditional IRA because contributions aren't tax-deductible. However, withdrawals are tax-free in retirement.*

Some people use a Roth IRA to save for college instead of retirement because withdrawals are exempt from penalties when used to pay for qualified education expenses (like tuition, fees, books, and room and board).

However, when used to pay for college, these withdrawals are not exempt from income tax on earnings unless the account owner is age 59½ or older.**

Even if you'll be over age 59½ when you need the money, you'll still need to consider these points:

Using a Roth IRA could mean less money for retirement.

You can only contribute a certain amount per year to all your IRAs combined, so money you save for college in an IRA is money you can't save for retirement.

Your earnings are subject to a 5-year holding period.

If you take money out of a Roth IRA before you've owned the account for 5 years, you'll owe ordinary income tax on the earnings—if the withdrawal includes earnings—plus a 10% penalty tax.**

You may not be able to contribute as much as you intended.

The 2023 IRA contribution limit is $6,500 ($7,500 if you're age 50 or older). The 2024 IRA contribution limit is $7,000 ($8,000 if you're age 50 or older).

Your financial aid package could take a hit.

Money you have saved in IRAs isn't initially counted when financial aid packages are put together. However, when you take money out to pay college expenses, it will be considered income for that year—and weigh against you much more heavily the following year.

What goals can a Roth IRA support?

If you’re saving for retirement, a Roth IRA can help you build your nest egg. Advantages include:

  • No required minimum distributions (RMDs).
  • No contribution age limit, as long as you have earned income.
  • No employer-plan restrictions.
  • No taxes on your beneficiaries’ withdrawals.***

Learn more about Roth IRAs

Using whole life insurance for college

Insurance companies sometimes sell whole life insurance policies as a way to save for college too. It might sound like a good deal, but watch out for these downsides.

You could tie up your money for many years.

You can usually get the "cash value" of your policy back whenever you want, but it typically takes years before that cash value equals the amount you've given the insurance company.

You probably won't get much in return.

These policies typically pay only a couple percentage points in annual returns. If you're locked into a fixed rate that's lower than what the financial markets return—and over 18 years, that's more likely than not—you'll be giving up money you could have used for college.

Your financial aid package could take a hit.

As with a Roth IRA, the cash value of your policy won't be counted as savings—but once you withdraw money, it will be counted as income and cut your financial aid package the following year.

You could pay a lot more.

Costs for whole life insurance policies are usually much higher than those you'd pay for low-cost investments available through other account types. Again, this means less money for college bills.

See how high costs can leach money from your savings

What goals can whole life insurance support?

Whole life insurance, also known as traditional life insurance, provides a death benefit for your beneficiaries. It also has an interest-bearing cash savings component from which you can draw and borrow. Benefits may include:

  • Tax-free payouts to beneficiaries.
  • A way to pay for funeral expenses.
  • Coverage for chronic and terminal illness.
  • Supplemental retirement savings.

Using a bank account or CDs for college

As a parent, you're sure to feel that your main role is to protect your children—and that might translate into a desire to protect your college savings from the possibility of loss.

But remember that losses on investments aren't "locked in" until you sell the investment, and not all investments are equally risky. When you have a lot of time to let your money grow, taking on a little more risk can make a huge difference.

And taking on some risk might be necessary if you want the value of your savings to keep pace with inflation in college prices.

For example, imagine you saved $25 a week for 18 years, and kept it in a bank account earning 1% annual interest. When it's time for college, you'd have about $25,750—the $23,400 you put in and about $2,350 in interest.

Now imagine you invested the money and earned 6% a year. After 18 years, you'd have about $42,600 instead.

That's almost $17,000 extra—additional money that could go a long way toward helping protect your child's college dreams.

Choose the right account for you


Give your savings a chance to grow

This hypothetical illustration assumes a monthly deposit for 18 years, for all examples. This illustration does not represent any particular investment nor does it account for inflation. There may be other material differences between investment products that must be considered prior to investing. The rate of return is not guaranteed.

What goals can a bank account or CD support?

Bank accounts and CDs (certificates of deposit) can help you save for short-term investing. Although these investments earn interest, they don’t provide the competitive returns that longer-term investments, like stock or bond funds, can. CDs can:

  • Help you save for short-term investing goals, like buying a car.
  • Provide a low-risk place to put cash you don’t plan to use right away.
  • Deliver higher yields than you’d get with bank accounts and money market funds.
  • Provide a government-backed investment option.

Learn more about CDs

We're here to help

Talk with one of our education savings specialists.

Call 866-734-4533

Monday through Friday
8 a.m. to 8 p.m., Eastern time

Open a Vanguard 529 account

*The 5-year holding period for Roth IRAs starts on the earlier of: (1) the date you first contributed directly to the IRA, (2) the date you rolled over a Roth 401(k) or Roth 403(b) to the Roth IRA, or (3) the date you converted a traditional IRA to the Roth IRA. If you're under age 59½ and you have one Roth IRA that holds proceeds from multiple conversions, you're required to keep track of the 5-year holding period for each conversion separately.

**Distributions received before you're age 59½ may not be subject to the 10% federal penalty tax if the distribution is due to your disability or death; is distributed by a reservist who was ordered or called to active duty after September 11, 2001, for more than 179 days; or is for a first-time home purchase (lifetime maximum: $10,000), postsecondary education expenses, substantially equal periodic payments taken under IRS guidelines, certain unreimbursed medical expenses, an IRS levy on the IRA, or health insurance premiums (after you've received at least 12 consecutive weeks of unemployment compensation).

***If you inherit a Roth IRA, you must take RMDs, but they're tax-free as long as the original account owner held the account for at least 5 years.

For more information about The Vanguard 529 College Savings Plan, visit vanguard.com to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Vanguard Marketing Corporation, Distributor.

If you are not a Nevada taxpayer, consider before investing whether your or the designated beneficiary's home state offers any state tax or other benefits that are only available for investments insuch state's qualified tuition program. Other state benefits may include financial aid, scholarship funds, and protection from creditors. 

The Vanguard 529 College Savings Plan is a Nevada Trust administered by the office of the Nevada State Treasurer. 

The Vanguard Group, Inc., serves as the Investment Manager for The Vanguard 529 College Savings Plan and through its affiliate, Vanguard Marketing Corporation, markets and distributes the Plan. Ascensus Broker Dealer Services, LLC, serves as Program Manager and has overall responsibility for the day-to-day operations. The Plan's portfolios, although they invest in Vanguard mutual funds, are not mutual funds. Investment returns are not guaranteed, and you could lose money by investing in the Plan. 

All investing is subject risk, including the possible loss of the money you invest.

You may wish to consult a tax advisor about your situation.