3 in 4 Americans Say Higher Education Is the Key to Being Wealthy. Here’s How to Save for One

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Getting a degree can be costly. Read on to learn about some accounts that could help you save for one efficiently. 

Going to college isn’t a given, and for some people, it may not be worth it. In fact, investing legend Warren Buffett says that he doesn’t think going to college is the right choice for everyone, and he isn’t even sure he got so much out of it.

But a good 75% of Americans say a post–high school education is important for becoming wealthy, according to data from Vanguard. So if it’s important to you that your kids attend college, then your best bet is to start saving for it as early as possible.

That doesn’t mean you should stick some money in a savings account and call it a day, though. A better bet is to invest the funds you have earmarked for higher education so that money can grow over time. And if you’re not sure where to put your college money, here are two accounts worth considering.

A 529 plan

A 529 plan allows you to enjoy tax-free gains in the course of saving and investing for college. To be clear, you won’t get a federal tax break on the money you put into a 529 (some states provide a tax break). But investment gains in your account, as well as withdrawals, will be tax-free as long as that money is used to pay for educational expenses.

And it doesn’t even have to be college expenses. You could decide to take a 529 plan withdrawal to pay for private high school tuition, and that’s allowed.

However, you should know that if you end up with too much money in your 529 and you take withdrawals for non-educational purposes, you’ll be penalized 10% on the gains portion of your withdrawals and taxed on that sum as well. You won’t be penalized on the principal portion, since your contributions were never eligible for a federal tax break in the first place.

A Roth IRA

A Roth IRA could be another good place to save and invest for college. Like a 529 plan, you won’t get a tax break on the money you put into a Roth IRA, but investment gains and withdrawals are yours to enjoy tax-free.

Now, you may be thinking, “Hold up — isn’t a Roth IRA supposed to be used for retirement?” And you’d be correct. After all, IRA stands for “individual retirement account.”

However, these accounts allow you to take withdrawals without a penalty in order to pay for college. And if you wind up with excess money in a Roth IRA, it’s really not a problem, because at that point, you can simply reserve those funds for retirement and put them to good use down the line.

It’s not a given that a college education will lead to a higher-paying job and more wealth-building opportunities. But if it’s important to you that your kids attend college, you’ll likely want to save and invest for it in the most efficient manner possible. And so it pays to consider a 529 plan or a Roth IRA if you’re looking to find a home for your college fund.

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