Should You Save for College in a Regular Brokerage Account?

It's important to keep your college fund in the right place.

Paying for college is far from an inexpensive prospect these days. The average cost of college tuition and fees for the 2022-2023 academic year, according to U.S. News & World Report, is:

• $10,423 for in-state public colleges
• $22,953 for out-of-state public colleges
• $39,723 for private colleges

When you multiply these figures by four years, and then add in the cost of room and board and incidentals, you get, well, some pretty scary numbers. And if you don't want your kids to end up graduating from college with a heaping pile of debt, then you may want to do your best to save for their education.

But where should you put those college funds? You may be tempted to open a 529 plan or even save for college in a Roth IRA. Both are great options and offer nice tax breaks. But what about a regular brokerage account?

The upside of putting college savings into a brokerage account

Both 529 plans and Roth IRAs let you reap tax breaks in the course of saving for college. Both accounts give you tax-free investment growth and tax-free withdrawals.

But both plans have restrictions. With a 529 plan, if you take a withdrawal for non-educational purposes, you're penalized 10% on the gains portion of your withdrawal. Plus, your withdrawal will be subject to taxes.

With a Roth IRA, you can take a penalty-free withdrawal at any time provided you're only touching the principal portion of your account, not the gains portion. But Roth IRAs come with annual contribution limits you need to adhere to.

This year, for example, you can only put up to $6,500 into a Roth IRA if you're under age 50, or up to $7,500 if you're 50 or over. If you're behind on college savings and need to catch up, those limits might be restrictive.

The good thing about a regular brokerage account is that you can invest any amount of money you want in a given year -- there are no limits on how much money you can put into your account. And also, you can cash out your gains at any time, for any reason, without having to worry about penalties.

Now, you will have to pay taxes on capital gains in a brokerage account. But you also get the freedom to do what you want with your money. And if your kids decide not to go to college, or to go to a very inexpensive college, you won't have to worry about what to do with all of the money you've saved.

The downside of putting college savings into a brokerage account

The only real downside to choosing a regular brokerage account for your college savings is forgoing any sort of tax break. But remember, neither a 529 plan nor a Roth IRA gives you a tax break on your contributions. You're only getting a tax break on your investment gains and withdrawals.

Making your choice

So should you house your college savings in a regular brokerage account? Well, that depends.

One approach you may want to take is maxing out a Roth IRA or contributing a portion of your educational savings to a 529 plan, and then saving beyond that point in a brokerage account. Splitting your money up across multiple accounts might give you the best of all worlds -- some tax benefits, and also, some of the flexibility you need to spend your money as you choose.