How to Setup a College Savings Account for Your New Baby

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Jeff White, CEPF

By Jeff White, CEPF

November 25, 2022

There are several ways to set up a college savings account for your baby, from 529 savings accounts and Coverdell ESAs to more general savings and investment accounts, such as Individual Retirement Accounts. Let’s take a look at some of the best types of college savings accounts, and how to set one up for your little one, because the earlier you get started with saving for college, the better.

If you’re ready to open your child’s account, consider the best 529 plans available today.

Why a New Baby Needs a College Savings Account

Sending your child to college is an investment that will help them to build a successful, well-paid career: college graduates are not only better paid, but they’re less likely to be unemployed. However, you need a way to finance that investment. If your child tries to finance it themselves, even a part-time job can pull their focus from their studies and threaten that investment, not to mention that college costs have long been rising much faster than wage growth.

Equally, taking out loans could give your child a huge burden of student debt and is far more expensive in the long term than paying for college with savings. Financial aid can help, but you can’t rely on your child being able to secure enough financial aid to cover growing higher education costs, especially as the total amount of federal aid has declined every year over the past decade.

The best solution is almost always to set up a tax-advantaged college savings account, and as early as possible.

The Costs of Going to College

College can be very expensive. Tuition can vary greatly depending on the school, especially if your child wants to go to a renowned private institution. However, even public schools can have annual tuition of $20,000 for out-of-state students, so over the course of a four-year degree, a student today can easily spend over $100,000 in tuition, room and board, supplies, and fees.

In addition to tuition, you’ll also need to cover institutional fees, room and board, and a range of other costs associated with your child’s tertiary education.

Furthermore, these costs are likely to increase over the next 18 years until your baby is ready to go to college. Between 1980 and 2020, the average cost of an undergraduate degree rose by 169%, and odds are that this growth trend will only accelerate in the future.

The earlier you start your child’s saving account the better, as compound interest and tax benefits can add up over time, greatly reducing the total amount you’ll end up paying for college.

Therefore, while it may seem premature to already be planning for your new baby’s college expenses, this is the best thing you can do to secure their future without putting you – or them – under financial stress.

Types of College Savings Accounts

There are multiple types of college savings accounts, including education-specific accounts such as 529 savings plans and Coverdell ESA plans, as well as IRA and savings accounts. This can be one of the most confusing things for new parents who want to plan for their child’s future, as each type of savings account has its own distinct benefits and advantages. The right choice for you will depend on your family’s situation and future plans.

1. 529 Plans

529 plans are tax-advantaged programs that are designed to help you pay for your child’s primary, secondary, or college education. The most common type of 529 plan is the 529 savings program, sometimes also called college savings plans (CSPs) or college investment plans (CIPs).

When you open a 529 savings account, you name a beneficiary, such as your baby, and make contributions, which are then invested on their behalf. When the beneficiary goes to college, they can use these funds to make qualified distributions, such as paying for tuition, fees, and room and board.

Note there is also a second type of 529 plan, prepaid 529 plans, which offer similar tax advantages to 529 savings plans but work in a slightly different way. These plans allow you to pay in advance for a certain number of credit hours or semesters at a specific university, usually an in-state public school. Take a look at this guide to 529 prepaid programs to learn more.


  • Various federal and state tax advantages
  • Flexible: you can change the beneficiary to another qualifying family member at any time
  • Generous contribution limits, so you can invest as little or as much as you can afford
  • State-sponsored and professionally managed
  • Allow you to maintain ownership over the 529 accounts, so you control when money is withdrawn and for what purpose


  • Any funds used for non-qualified expenses (ie. non-education related spending) will be subject to ordinary income tax, as well as a 10% penalty
  • Limited control over how your money is invested, as this is determined by the state and the investment manager they appoint
  • Investment or program management fees apply, though these are usually modest

One of the major benefits of 529 plans is their tax advantages. When it comes to federal income tax, the money you invest will grow tax-deferred and you can withdraw funds for qualified expenses tax-free. You cannot deduct contributions on your federal income tax return, but you can defer paying tax on these, allowing you to compound your earnings.

Most states that impose income tax also offer state tax advantages for 529 contributions. Currently, more than 30 states as well as the District of Columbia offer state income tax deductions and tax credits for 529 plan contributions.

2. Individual Retirement Account (IRA)

In particular, Roth IRAs can be a good way to pay for a baby’s college in the future, offering tax-free withdrawals once you’re 59 1/2, as well as tax-free and penalty-free distributions on contributions at any time. Essentially, you can put money into your IRA as early as possible so that it can earn more returns, take out only what you’ve contributed to pay for your baby’s college, and then withdraw your earnings when you retire.


  • Tax-free and penalty-free withdrawals on contributions
  • Very flexible: you can use the funds to pay for your baby’s college, or for something else
  • Relatively-high annual contribution limit of $6,000, and $7,000 for people over 50
  • No minimum distributions until the account owner dies


  • Unless you’re over 59 1/2, withdrawing earnings counts as taxable income
  • Annual contribution limits may be reduced depending on your annual income
  • Contributions need to be made from your after-tax income

3. Coverdell ESA

Coverdell education savings accounts, or Coverdell ESAs, are another form of tax-advantaged savings account specifically for expenses related to your baby’s future education. You can open a Coverdell ESA with an investment broker or financial institution offering investment options, name your baby as the beneficiary and then make contributions that will be invested in stocks, bonds, mutual funds, certificates of deposit, or other assets, depending on your preferences.


  • Earnings from Coverdell ESAs are tax-deferred and can be withdrawn federally tax-free for qualified education expenses
  • High level of control over your investments
  • Can be used to pay for a wide range of education-related expenses, including elementary and secondary school expenses, for both public and private schools
  • Plans are simple and easy to understand


  • Narrow contribution limits: you can only contribute up to $2,000 per child per year before incurring federal excise tax
  • Relatively-low contribution limits mean fees can represent a higher percentage of your account than other types of plans
  • Age restrictions apply: all funds will need to be spent by the time your baby turns 30

4. Savings Account

Although a savings account is not designed for saving for college, it might be a useful way to do this, especially as a complimentary account to separate education-specific savings plans for your baby. You can put money into any bank savings account and then take out funds to pay for your baby’s college tuition or other expenses. You won’t enjoy any tax benefits, neither are the returns substantial, but you’ll be free to spend the money you save on whatever you choose. Furthermore, using a high-yield savings account will help you to maximize your returns.


  • Highly flexible, allowing you to spend the funds on whatever you want
  • Flexibility means you can pay for any kind of expenses associated with your baby’s education, or if they decide not to go to college, you can use the funds for something else instead
  • Not limited to a named beneficiary, so you can easily use your savings account to pay for college for another child


  • Tax is usually payable on distributions, and is subject to any tax benefits such as tax-deferred contributions
  • Returns on savings accounts are typically much lower than on investments

One of the key differences between savings accounts and 529 plans is how distributions are treated. Under a 529 plan, you can use account funds to pay for qualified items, such as tuition and other education expenses. However, if you use cash from a regular savings account to pay for your child’s college education, this will be taxed as a gift.

How to Open a College Savings Account for Your Baby

Do you know what type of savings account you want to set up for your baby’s college fund, but you’re not sure where to start? Let’s take a look at how to open a college savings account, using a 529 plan as an example.

Step 1: Choose a 529 Plan

The first thing you need to do is decide which is the best 529 plan for you. The range of choice may seem overwhelming, so start with the 529 plans offered by your state, as they may offer benefits for residents, such as state income tax deductions on contributions.

It’s also a good idea to consider the 529 plans offered by other states: each state has its own plan and you don’t need to be limited to the state where you live or where you think your child will go to college. Your baby can still use the money to go to college anywhere. Instead, it’s important to consider factors such as whether investment options match your investment objectives and preferred level of risk, how well the investment portfolios have performed in the past, and the plan’s specific rules and restrictions.

Step 2: Determine the Type of 529 Account

Next, you’ll need to decide which type of 529 accounts you want to open.

There are two different types:

  • Individual 529 accounts: This is a regular 529 plan account, where an adult, usually a parent but sometimes a grandparent, another family member, or friend, is the account owner and the student is the beneficiary.
  • Custodial 529 accounts: In this type of account, the student is both the account owner and the beneficiary. If the student is a minor, the account will be managed by a designated custodian until they turn 18.

Generally, when setting up a 529 savings account for your baby, it will make the most sense to open an individual account with you as the account owner and your baby as the beneficiary. Note that typically, only one parent can be named the account owner.

Step 3: Complete a 529 Application

Once you’ve compared a range of different 529 plans and decided which is the best for you, it’s time to open an account.

Visit the enroll now tool and follow these steps:

  1. Find the plan you want and click on the “enroll now” button next to its listing
  2. Once the online application loads fill in the name of the account owner, the name of the beneficiary, and personal information about each, such as Social Security numbers and dates of birth.
  3. In some cases, you’ll need to pay a fee in order to submit your application.

Note you can also complete an application by visiting the 529 plan’s website. 

Step 4: Fund the Account

Many 529 savings plans require you to make an initial contribution in order to kick off your plan. In any case, you’ll want to start making contributions as early as possible to maximize the returns on your investment.

You can do this in a range of ways, from transferring money electronically to mailing a check to the program administrators. All 529 plans also allow you to set up automatic contributions, which is a great way to ensure you continue to fund your account.

Step 5: Choose Your Investments

Once you’ve opened and funded your 529 accounts, you can choose the type of investment portfolio you want from a limited range of options, usually categorized according to risk profile. Many people opt for an age-based portfolio that begins with a higher-risk, higher-return mix of investments and over a period of time shifts to a lower-risk investment profile as your child gets closer to going to college.

Tips for Opening a College Savings Account for Your Baby

It’s never too early to think about saving for college, regardless of how old your child is. While it isn’t always an easy-to-understand thing to do, there are plenty of opportunities. Here are a few tips to keep in mind when saving for your baby’s college education to help you get off to a good start:

  • Automate your saving as much as possible, such as setting up automatic investment options and contributions to your 529 plan.
  • Minimize your tax by taking advantage of all possible tax advantages associated with your baby’s college savings account, and speak to a tax account if in doubt.
  • Consider Coverdell ESAs for private schools: If you plan to send your child to a private elementary or secondary school, it could be worth investing in a Coverdell ESA. You can always use any funds left over for their college education.
  • Go for a mix of investments between taxable and tax-free investments, and aim to concentrate the growth portion of your investments in your taxable accounts and the income-producing portion in your 529 or Coverdell ESA.

The Bottom Line

Saving now for your baby’s future college education will give you more freedom and more options later down the line. With a healthy college fund, your child won’t need to be dependent on financial aid, nor will they be forced to take out crippling student loans.

There are a number of different types of college savings accounts for your baby, including 529 plans, Coverdell ESAs, Roth IRAs, and traditional savings accounts. For most families, a 529 plan will be the right choice that maximizes the most amount of benefit for your child.

Frequently Asked Questions (FAQs)

What is the best college savings plan for my child?

There is a range of different college savings plans, from education-specific programs like 529 savings plans and Coverdell ESAs to more general options like Roth IRAs and even savings accounts. Each type of plan has its own pros and cons, so in the end, it’s really down to your family’s needs and preferences. If you’re in doubt, you can always diversify your portfolio and enjoy the benefits of each by opting for a mix of two or more different types of plans for your baby.

Should I start a 529 plan before my child is born?

You can start a 529 plan at any time, and the earlier the better. The sooner you set up your account and start making contributions, the more time you’ll have for your investment to grow before your baby goes to college. Thanks to compound interest, contributions you make early on can grow exponentially by the time your little one is 18.

Therefore, if you’re in a position to open a 529 plan before your baby is born, this could help you to maximize the benefits and minimize the amount you’ll eventually end up paying for your child’s college education. Technically, you’ll need a social security number for your baby in order to open a 529 plan for them, but there are a couple of workarounds for this: learn how here.

How much should I put into my child’s 529 plan per month?

The most important thing is to only contribute as much as you can afford, while trying to make as many payments as you can, particularly when your child is young. Most experts recommend contributing between $5000 and $30,000 per year to 529 plans, but the earlier you start, you can aim for the lower end of this range. It’s also important to keep contribution limits in mind so that you don’t incur tax penalties, though these are very generous for 529 plans. You can use our free calculator to estimate what you should save. 

How much will my baby’s college education cost?

As college tuition, fees and expenses are rising all the time, it’s difficult to know exactly how much your baby will need to pay to go to college. However, based on current trends, many commentators are predicting that in 18 years the cost of a four-year degree will be around $180,000 for public schools and $300,000 for private universities.

A good place to start:

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