529 Plans / Saving for College / Taxes
529 Plan or High Yield Savings Account?
529 plan or High Yield Savings Account?

When choosing the best option to invest for college, many folks have questions which is the way to go. I’ve seen many people asking, should I use a 529 plan or a high-yield savings account? Unfortunately, I think the question itself stems from a misunderstanding. You can use both at the same time, in theory. It should be noted, however, that this requires an understanding of three things: taxes, risk tolerance & time horizon.

529 Plans

I am a big proponent of using a 529 plan to help pay for college for one major reason: Taxes. The tax benefits within a 529 plan are usually the best you will find when saving for college. It can be treated like a Roth IRA, in that the growth is tax-deferred and qualified education expenses are tax-free. You can also potentially get a state tax deduction in certain states. Needless to say, it’s a great option.

But a 529 plan is an account. It is NOT an investment. It is critically important to distinguish between the 2. Much like an IRA or 401(k), a 529 plan is a tax-favored account that has rules & criteria that can allow for favorable taxable investing. But a 529 plan itself is not an investment.

Instead, investments are chosen within a 529 plan. That’s where you can do both a High-Yield Savings account, and a 529 plan.

High-Yield Savings Accounts

While higher interest rates typically are not accompanied by a growing economy, the advantage they do hold is that savers can often see an increase on guaranteed accounts. But you must know where to look. Online banks typically can offer a higher interest rate, with some banks offering an excess of 5% APY on cash reserve accounts.

The even better part? You can make those savings tax-efficient by investing in a High-Yield guaranteed fund within your 529 plan! You should call your state’s provider/custodian to review the options, but this is a great way for parents to save for students at or near college.

Budgeting & Timing

Thankfully, parents can keep a conservative risk tolerance for those who may need it most, but still earn some interest. The timing of your 529 allocation should be viewed after you properly budget how much you’ll be able to allocate for your child. For example, if I have $20,000 saved in a 529 plan, and I realize I need $25,000 over the four years, I can safely allocate the funds to earn an interest rate that is competitive, while bridging the gap with my cash flow.

Note: The IRS allows 2 529 allocation changes per year. Frankly, there really isn’t a reason to be making more than 2 changes per year. Understanding your budget and investment choices in conjunction with the time horizon and tax benefits make for a winning 529 strategy.


Everyone’s situation is unique, but for many families approaching college, you should be focused on these factors listed. You also want to be cognizant of the fees you pay to an advisor & the fund company. Target funds that have an expense ration of 0.25% or lower, and give serious consideration to working with an advisor who charges a sales charge on mutual funds. By working with a fiduciary, fee-only advisor, you know you’ll get advice that is sound and in your best interest.

About the Author

Dan Cieniewicz headshot

Learn More

Related Posts

Why a 529 Beats a Roth IRA when Saving for College

Why a 529 Beats a Roth IRA when Saving for College

 If you're looking to pay for college, there are no shortage of possibilities.  You are probably familiar with the most popular account, the 529 plan. The 529 plan has been around since 1996. These are typically going to be issued by the state of your residence....

read more
Budgeting for College: The 5 Sources

Budgeting for College: The 5 Sources

When it comes to saving and specifically PAYING for college, it’s vital to have a budget. With any good plan, it’s ideal that a project come in under budget, but life doesn’t always happen that way. Budgeting for college can feel like a challenge, but knowing the...

read more
College Planning Case Study

College Planning Case Study

For many families out there, they may not yet be familiar with how TheCollegeDude has helped families pay for college. I wanted to provide an example of what that looks like, and how this could apply to your situation. I created a college planning case study for that...

read more

My Specialties

Finances, College, & Planning

College Planning

Student Loan Planning