What You Need to Open a College Savings Account

You can open a college savings account at a bank, credit union, or investment firm — you do not need to wait until your child is a teenager or have a large sum to start. Most accounts require your Social Security number, your child's Social Security number, a form of ID, and an initial deposit that ranges from $0 to $500 depending on the institution. Some banks waive the minimum if you set up automatic monthly transfers.

The two most common account types are a 529 plan (a tax-advantaged savings account run by your state) and a Coverdell Education Savings Account (a smaller account with lower annual contribution limits but more investment choices). A regular custodial savings account at your bank works too, though it does not offer tax breaks. Your choice depends on how much you plan to save and whether you want tax benefits.

You will need to decide whether to open the account in your name as custodian or in your child's name with you as the custodian. A custodial account means you control the money until your child reaches the age of majority (usually 18 or 21, depending on your state). This protects the funds and keeps them from affecting your child's financial aid later.

Key Takeaways

  • You can open a college savings account at any bank, credit union, or investment firm with your ID, your child's Social Security number, and often as little as $0 to start.
  • A 529 plan offers tax-free growth on education savings and is sponsored by your state, though rules vary by state on how the money can be used.
  • A Coverdell Education Savings Account has lower annual contribution limits ($2,000 per year) but gives you more control over how the money is invested.
  • Opening a custodial account keeps you in control of the money until your child reaches adulthood and may help protect financial aid may be able to access later.
  • You can start with any amount — many institutions have no minimum deposit, and you can add money whenever you want.

529 Plans: Tax-Advantaged Savings Through Your State

A 529 plan is a savings account sponsored by your state that lets your money grow without being taxed on the earnings. You contribute after-tax dollars, but the growth is tax-free as long as you use the money for education expenses. This means if you put in $10,000 and it grows to $15,000, you do not pay federal tax on that $5,000 gain.

Each state runs its own 529 plan, and you can open an account in any state's plan regardless of where you live. Some states offer a tax deduction on your state income tax if you contribute to your own state's plan — the deduction amount varies by state, from $235 per year in some states to unlimited in others. Check your state's plan website to see if you get a deduction and what the rules are.

You can use 529 money for tuition, room and board, books, and required equipment at any accredited college, university, or trade school. Some states also allow you to use up to $35,000 to pay down student loans, and recent changes let you roll unused money into a Roth IRA for the beneficiary (your child) under certain conditions. The rules change, so confirm what your state allows before you open the account.

To open a 529 plan, go to your state's plan website (search "[your state] 529 plan"), create an account online, provide your information and your child's Social Security number, choose how to invest the money (usually from a menu of age-based or target-date portfolios), and make your first deposit. The whole process takes 15 to 30 minutes online.

Coverdell Education Savings Accounts: More Control, Lower Limits

A Coverdell Education Savings Account (also called an ESA) is a smaller savings account that lets you contribute up to $2,000 per year per child. Like a 529 plan, the money grows tax-free and you do not pay tax on the earnings when you withdraw it for education. The main difference is that you have more control over how the money is invested — you can choose individual stocks, bonds, or mutual funds instead of picking from a state-run menu.

Coverdell accounts have income limits: if you earn more than $110,000 (single) or $220,000 (married filing jointly), you cannot contribute the full $2,000. The contribution phases out completely at higher income levels. This makes Coverdells better for families with lower to moderate incomes who want investment flexibility.

You can open a Coverdell at most banks, credit unions, and investment firms. You will need your child's Social Security number, your ID, and an initial deposit (usually $0 to $100). The account must be opened before your child turns 18, and the money must be used by age 30 or you will owe taxes and a 10 percent penalty on the earnings.

Custodial Savings Accounts: No Tax Benefits, Full Flexibility

A custodial savings account is a regular bank account opened in your child's name with you as the custodian. You control the account until your child reaches the age of majority. There are no contribution limits, no income restrictions, and no rules about what you use the money for — you can withdraw it for anything, not just education.

The trade-off is that you do not get tax breaks on the growth. Any interest or earnings above $1,350 per year (as of 2024) is taxed at your child's tax rate, which is usually lower than yours but still taxed. Custodial accounts also count against your child's financial aid may be able to access more heavily than 529 plans do — the federal aid formula assumes a higher percentage of the child's assets will go toward education costs.

You can open a custodial account at any bank or credit union. Bring your ID, your child's Social Security number, and an initial deposit (often $0 to $25). The account is yours to manage until your child turns 18 or 21 (depending on your state and the account type), at which point it becomes theirs to control.

How to Choose Between Account Types

Use a 529 plan if you want the biggest tax advantage and plan to save a significant amount over time. The tax-free growth adds up, and many states offer a state income tax deduction. 529 plans work best for families who know they will use the money for college and want to lock in tax benefits.

Use a Coverdell if you earn less than $110,000 (single) or $220,000 (married), want to choose your own investments, and plan to save less than $2,000 per year. Coverdells give you more control but have lower contribution limits and stricter age rules.

Use a custodial savings account if you want no restrictions on how you use the money, do not may have access to for a 529 or Coverdell, or want to keep things simple. You sacrifice tax benefits, but you keep full flexibility.

Many families use both a 529 and a custodial account — the 529 for the tax advantage and the custodial account for extra savings or flexibility. There is no rule against having both.

Opening the Account Step by Step

For a 529 plan: Visit your state's plan website, click "open an account" or "enroll," create a login, enter your Social Security number and your child's Social Security number, choose your investment option (most plans offer age-based portfolios that automatically shift to safer investments as your child gets older), set up your initial deposit and any automatic monthly transfers, and submit. You will receive confirmation and account statements by mail or email.

For a Coverdell: Go to your bank, credit union, or investment firm's website, select "open a Coverdell" or "education savings account," provide your ID and your child's Social Security number, choose your investment options, make your first deposit, and confirm. Some institutions let you open it entirely online; others require a visit or a phone call.

For a custodial account: Visit your bank or credit union in person or online, ask for a custodial savings account (sometimes called a "UTMA" or "UGMA" account), provide your ID and your child's Social Security number, choose savings or checking, set your initial deposit, and sign the paperwork. The account is active immediately.

After opening, you can add money whenever you want — through automatic transfers, one-time deposits, or by having relatives contribute directly to the account. Many institutions let you set up a recurring monthly transfer so you save without having to remember each month.

What Happens to the Money When Your Child Turns 18

With a 529 plan, you stay in control of the account even after your child turns 18. You decide when and how much to withdraw for education expenses. If your child does not go to college or does not use all the money, you can change the beneficiary to another child or grandchild, or roll the unused balance into a Roth IRA for your child (up to $35,000 under current rules).

With a Coverdell, the account must be emptied by your child's 30th birthday or taxes and penalties apply. You can transfer it to another child's Coverdell before that deadline to avoid the penalty.

With a custodial account, the money becomes your child's property at the age of majority (18 or 21, depending on your state). You lose control, and your child can spend it however they want. Some parents open custodial accounts with this in mind and accept that their child may not use it for college.

Frequently Asked Questions

Can I open a college savings account if my child does not have a Social Security number yet?

Most institutions require a Social Security number to open an account. If your child does not have one yet, you can obtain one from the Social Security Administration — it takes about two weeks. Some 529 plans let you open an account with a temporary ID number and update it later, so call your state's plan to ask.

What if I want to change which child the money goes to?

With a 529 plan, you can change the beneficiary to another child or grandchild at any time with no tax penalty. With a Coverdell, you can transfer the balance to another child's Coverdell before age 30. With a custodial account, you cannot change the beneficiary — the money belongs to the named child.

Does a college savings account hurt my child's chances of getting financial aid?

529 plans and Coverdells count against financial aid may be able to access, but less heavily than custodial accounts do. The federal aid formula assumes a higher percentage of a custodial account will go toward education. If financial aid is a concern, a 529 plan in your name (not your child's) has the smallest impact on aid may be able to access.

Can I withdraw money from a college savings account for something other than college?

With a 529 plan or Coverdell, withdrawing money for non-education expenses means you owe taxes and a 10 percent penalty on the earnings (not the contributions). With a custodial account, you can withdraw money for any reason with no penalty, but the money belongs to your child once they reach adulthood.

How much should I contribute each month?

There is no required amount. Some families contribute $50 a month, others $500. The more you save and the earlier you start, the more time the money has to grow. Even small amounts add up over 18 years, especially with tax-free growth in a 529 or Coverdell.