Education Planning Tips for Self-Employed Parents

According to the Bureau of Labor Statistics, as of 2024, 16.75 million workers in the U.S. were self-employed. This makes up approximately 10% of the country’s total workforce. Self-employment can be a real boon. It gives you freedom, flexibility, and control over your work hours. You get to be your own boss, which can be one of the best things workwise.

But this freedom also comes with fluctuating income. When you are single or part of a couple, it is easier to ride out the ups and downs. However, once children enter the picture, your financial responsibilities skyrocket, and planning for their education becomes essential.

Education planning for self-employed parents is not drastically different from that of salaried individuals, but it does require extra discipline. You need to prepare for periods when your income might dip. Fortunately, there are several effective college savings options for freelancers, entrepreneurs, and other self-employed individuals.

Let’s explore how you can plan and secure your child’s education if you are part of the gig economy or run your own business.

Below are 3 accounts that can be suitable for education planning for self-employed parents:

1. 529 plan for self-employed – the pioneer in education planning for self-employed parents

A 529 plan is a state-sponsored, tax-advantaged savings plan designed for education expenses. It is an investment account where your contributions grow tax-deferred. The money you put in is invested in a mix of stocks and bonds, and over time, those investments have the potential to grow. The best part is that when you withdraw funds to pay for qualified education expenses, such as tuition, you do not pay federal income tax on those withdrawals. Many states even let you skip state taxes on the earnings. As a self-employed parent, that is a huge benefit.

The 529 plan for the self-employed fits perfectly, as it does not have income restrictions, and you can contribute as much or as little as you like, whenever it suits you. Opening a 529 plan is also pretty straightforward. You need to be at least 18 years old, a U.S. resident with a Social Security number or Tax ID and have a valid mailing address. Each state offers its own version of the plan, and while the core idea is the same everywhere, the investment options and benefits can differ. You can usually choose from a few portfolio types.

You can use the money not just for college tuition but also for student loan repayments, K–12 expenses, and apprenticeship programs. If your child decides not to go to college, you can change the beneficiary to another family member without penalties. And if your child earns a scholarship or joins a U.S. military academy, you can withdraw the amount equivalent to the scholarship money without paying the 10% penalty, though regular income tax on earnings would still apply.

Another feature that makes a 529 plan perfect for self-employed individuals is that it allows gifts. Others can contribute directly to your child’s plan. One can even make large contributions of up to $95,000 per beneficiary, or $190,000 for a married couple, in a single year without affecting the lifetime gift tax exclusion.

Of course, there is a catch if the funds are not used for qualified education purposes. You will owe federal income tax on the earnings, plus a 10% penalty, and possibly state taxes as well. But as long as you stay within the education-related guidelines, the 529 plan is one of the most tax-efficient college savings options for freelancers and other self-employed parents.

2. Coverdell ESA for entrepreneurs and other self-employed individuals – the second but equally good option for education planning

The Coverdell Education Savings Account (ESA) is similar to a 529 plan, but with a few differences. This account gives you more investment choices. It comes with lower contribution limits and stricter income caps, but it can still be a good option for education planning for self-employed parents.

The Coverdell ESA for entrepreneurs and other freelancers allows your contributions to grow tax-free. When you withdraw them for qualified education expenses, such as elementary school, high school, or college, you do not owe any taxes on those withdrawals. The Coverdell ESA really stands out for its investment flexibility. With a 529 plan, you are generally limited to the set of portfolios offered by your state’s plan. But with a Coverdell ESA, you get to choose from a much wider range of investments, such as individual stocks, bonds, mutual funds, ETFs, and more. So, you get more hands-on control over investments that align with your income and risk appetite.

But there is one issue. The annual contribution limit for a Coverdell ESA is much lower than that for a 529 plan for self-employed people. You can contribute up to $2,000 per beneficiary per year. There are also some income restrictions. To contribute to a Coverdell ESA, your Modified Adjusted Gross Income (MAGI) must be below $110,000 if you file taxes as a single individual, or below $220,000 if you file jointly. So, higher-earning entrepreneurs may not qualify for the account at all. But for small business owners, freelancers, or new entrepreneurs, it can be a good fit.

There are also age limits to keep in mind. You can only open an account for a beneficiary who is under 18, and you can contribute only until they reach that age. Additionally, once the child turns 30, the account must be fully withdrawn or rolled over to another eligible family member.

3. Roth IRA education planning – the third and often overlooked strategy

Retirement and education savings may seem like opposite goals, but they can coincide sometimes. This is why using a Roth Individual Retirement Account (IRA) makes sense for education planning for self-employed parents. Normally, you cannot withdraw your earnings from a Roth IRA before the age of 59.5. But you can withdraw your original contributions to a Roth IRA at any time without paying taxes or penalties.

Moreover, withdrawals made for qualified higher education expenses are exempt from the 10% early withdrawal penalty, even if you are under 59½. For IRS purposes, qualified education expenses include tuition and enrollment fees, student activity fees, books, room and board, and education expenses for special needs students.

One reason a Roth IRA is a good college savings option for freelancers and other self-employed parents is that it offers tax-free growth and flexibility. Even if you use some of your contributions for college expenses, the new contributions you make continue to grow tax-free, and you will not owe taxes on qualified withdrawals. And, since Roth IRAs have no Required Minimum Distributions (RMDs), your savings can keep compounding as long as you have earned income.

Another big plus is versatility. Unlike a 529 plan or Coverdell ESA, a Roth IRA does not restrict you to education-only spending. If your child earns a scholarship or decides not to attend college, you can simply leave the funds untouched to boost your retirement savings.

That said, if you do use the account for funding your child’s education, every dollar you withdraw may put your retirement in jeopardy. So, you need to consider this and balance your needs effectively.

Strategies and considerations for education planning for self-employed parents

1- Understand FAFSA and make use of financial aid

Self-employed parents often experience income fluctuations. But while you may view this as a disadvantage, it can actually work to your advantage when applying for financial aid. Your child’s eligibility for the Free Application for Federal Student Aid (FAFSA) depends on your income. If your self-employment income is lower than usual during the year you file FAFSA, your child may qualify for more assistance.

Hence, you can choose a year when your income is low or even strategically reduce your income in the years your child is in college. For instance, if you run a business, you can use certain deductions, such as depreciation, to lower your reported income when you file taxes.

2. Use the tax advantages available to you

As a self-employed parent, you have access to multiple tax advantages. The tax code offers several ways to reduce your tax bill while covering education and childcare costs. You just need to know where to look. The money you save in taxes can be used to fund one of the accounts listed above.

Let’s start with something that helps right away—the Child and Dependent Care Tax Credit. This credit lets you deduct up to $1,050 in childcare expenses for one child or $2,100 for two or more children each year they qualify. To be eligible, you need to have earned income during the tax year. If you are filing jointly, the same rule applies to your spouse.

You also need to be the custodial parent or primary caretaker, and your child must be under 13, unless they have a physical or mental disability. Now, what counts as childcare? The IRS allows a surprisingly wide range of expenses. Babysitters, licensed daycare centers, and even housekeepers or maids who care for your child or dependent can qualify. Day camps, summer camps, and sports camps can also count, as long as they are for daytime care while you are working. Before-school and after-school care for kids under 13, as well as nurses or caregivers for disabled dependents, are also eligible.

Next up is the Child Tax Credit. You can claim up to $2,000 for each child under 17 and $500 for children 17 and older or other dependents. To qualify for the full credit, your MAGI must be $200,000 or less if you are single, or $400,000 or less if you are married and filing jointly.

You also have the Child and Dependent Care Credit, which is separate from the one above and can further lower your taxes. You can claim up to 35% of $3,000 in qualifying expenses for one dependent, and a maximum benefit of $1,050, or up to 35% of $6,000 for two or more dependents and a maximum of $2,100.

There are also education-related tax credits, such as the American Opportunity Tax Credit (AOTC). You can use this if your child is in college. It can reduce your taxes by up to $2,500 per year for up to four years of college. To qualify, your MAGI must be $90,000 or less if you are single or $180,000 or less if you are married filing jointly. This can be helpful if you have more than one child. You can save tax on one child’s expenses and use the savings towards the needs of the other child.

If you run a business, you can employ your children. You can pay them a salary and deduct it from your business expenses. Also, the income your child earns may be tax-free if it falls below the standard deduction threshold. Even healthcare costs can be used for tax deductions. Families can deduct most medical expenses that exceed 7.5% of their Adjusted Gross Income (AGI).

Tax credits can be complex, so consider consulting a financial advisor to use them properly.

Here’s the takeaway

Education planning for self-employed parents can be successful with tools such as 529 plans, Coverdell ESAs, and Roth IRAs. All of these can work beautifully to fund your child’s education while fitting your income patterns and long-term goals. The right choice really depends on your situation and how much you can contribute. So, evaluate your situation well.

You must also look into financial aid. Understanding how FAFSA works can make a big difference if your child applies for college funding later. And of course, make the most of tax breaks. This can help you reduce your tax burden while staying on track with your savings goals.

If this all feels like a lot to juggle, consider hiring a financial advisor. Use our advisor directory to connect with a qualified advisor who fits your needs.

Frequently Asked Questions (FAQs) about education planning for self-employed parents

1. What is the contribution limit for 529 plans?

The IRS sets no fixed annual contribution limit for 529 plans. However, most states have their own maximum limits on how much you can contribute.

2. What is the contribution limit for Coverdell ESA plans?

The annual maximum contribution to a Coverdell ESA is $2,000 per beneficiary.

3. What is the income eligibility for FAFSA?

There are no specific income limits to apply for federal financial aid. Anyone can submit the FAFSA. However, your income and assets determine how much aid you may qualify for. So, you will need to complete the FAFSA each year to determine your eligibility

4. What are the Roth IRA contribution limits for 2025?

You can contribute up to $7,000 if you are under age 50, and up to $8,000 if you are 50 or older in 2025.