“The family may be able to claim federal tax credits, the American opportunity or Lifetime Learning [credits], if it uses funds from outside a 529 account,” Cole says.

Since families can redeem only up to half a school year’s tuition, they have to determine what percentage of the tuition they want to redeem as well. And once that is all figured out, the family sends the form to PC529, which then sends payment to the institution named on the form.

IRAs

Some families set up retirement accounts for the sole purpose of putting away money for college and other major future expenditures. Like 529s, IRAs have age-based investment options, but their expansive investment options and penalty-free early withdrawals for qualified educational expenses distinguish them from the dedicated college account.  

Another difference is that federal financial aid doesn't count retirement savings accounts in the expected family contribution (EFC) estimates, though only for the first year. According to FinAid (finaid.org), the amount of money withdrawn in one year affects needs-based assistance the next year, something families should anticipate.

If a family is working with a traditional IRA, withdrawals are taxed as income since contributions to the account were tax-deductible. And withdrawals from the account must be made the same year the family plans to pay for the qualified expenses.

Families using a Roth IRA can take advantage of the tax-free withdrawals. Earnings on Roths are tax-free after the age of 59; therefore, most of a client's withdrawals will be from the principal unless they are 59.

UGMA And UTMA

The Uniform Gifts to Minors Act and the Uniform Transfers to Minors Act can be used for anything related to the beneficiary, such as a new car or an airplane ticket from school to the young adult’s hometown, explains Corey. The downside for parents is that once the beneficiary turns of age (depending on what age between 18 and 21 the state defines), he or she is entitled to full reign over the account.

“If a child wants to go backpack through Europe instead of college, they can do that because technically the money is theirs,” Corey says.