Ways To Save For A Childs Future Education Expenses

College is one of the most monumental expenses children face as they transition into adulthood, a burden often shared with their parents. To help ease the immediate burden on both parents and their adult children, parents can begin saving early for this large expense if they have the financial capacity.

One popular way to save for a child's higher education expenses, including trade schools, community colleges, and universities, is a 529 Savings Plan. These state-sponsored savings accounts offer state-level income tax-deductible contributions of up to $19,000 and allow funds to grow tax-deferred. When a child (i.e., the beneficiary of this account) begins taking withdrawals for qualified education expenses, all withdrawn funds are tax-free.

To help boost the impact of contributions made earlier in a child's life, the parents (i.e., the trustee) can invest account funds into stocks, bonds, and other investments to help grow the account over time. While parents are the most common funders of these accounts, grandparents, relatives, and non-related individuals can also contribute to a 529 plan.

In 2024, the Secure Act 2.0 expanded access to a variety of qualified expenses beyond traditional higher education, including K-12 expenditures. If a beneficiary does not use all the funds, they can roll a portion into a Roth IRA if certain requirements are met. Additionally, the parents or account trustee can transfer the funds to a different beneficiary so that their other children or relatives can access tax-free college funds.

While 529 plans are the most popular way to save for a child's future education needs, other accounts, such as UTMAs and ESAs, also exist, but with different benefits and drawbacks.

UTMAs, created under the Universal Transfer to Minors Act, are irrevocable investable accounts established by parents for their minor children and are not limited to education expenses. However, these accounts are not eligible for tax deductions. Upon the child attaining legal age (18 or 21, depending on certain factors), control of the funds switches to the now-adult beneficiary. While these accounts are not as tax-efficient as 529 Plans, they have more flexibility for contributions and withdrawals.

Lastly, Coverdell Education Savings Accounts, also known as ESAs, allow parents to save for their child's future education needs, whether for K-12 or college. While contributions, which are capped at $2,000 annually, are not tax-deductible, qualified withdrawals are tax-free. 

At Lundeen Abrams Advisors, we offer holistic financial planning that includes helping plan for a child's future. If you are considering funding an account for your child's future education expenses but are unsure where to start, we are here to help. Please call us or visit this page to schedule an appointment so we can start helping you plan out a better future for your family.