As we move into a new school year, it’s the perfect time to think about your child’s or grandchild’s education. Whether they are beginning their last year of a doctoral program or taking their first steps, it’s never too early or too late to start planning. We’ve included a non-exhaustive list of some of the more common educational savings account options below. Depending upon your financial situation, the right savings account could turn today’s investments into tomorrow’s opportunities.
1. 529 College Savings Plan
- Purpose: Designed for qualified education expenses such as college, trade school, and certain K–12 tuition costs.
- Benefits: Earnings grow and withdrawals are tax-free for qualified educational expenses. Many states offer tax deductions or credits for contributions, which are typically subject to income limitations.
- Flexibility: Funds may be used for specific programs and up to $10,000 in student loan repayment. You can also use $10,000 of 529 funds to pay for K-12 tuition in 2025. Starting in 2026, the K-12 tuition limit increases to $20,000.
- Considerations: With the Secure Act 2.0, you can roll over unused 529 funds to a Roth IRA for the beneficiary, subject to certain rules and restrictions. 529 Accounts typically have a limited scope of restricted age-based investment options.
2. Brokerage Account:
- Purpose: Designed for multipurpose investing and often considered an underrated investment tool.
- Benefits: Provides spending flexibility and maintains no contribution or distribution rules.
- Flexibility: Funds can be distributed and used for any purpose. Account can be dual-purposed; used to save for retirement & utilized to save for educational expenses. Investments are not restricted or limited.
- Considerations: All earnings in the account are subject to capital gains tax.
3. UTMA and UGMA Custodial Accounts
- Purpose: Transfer assets to a minor to use for any purpose that benefits the child.
- Benefits: Provide spending flexibility and maintain no contribution limits. However, contributions are subject to the annual gifting limits as they are generally considered irrevocable gifts to the minor.
- Flexibility: Distributions from these accounts are not restricted to educational use only. However, they must be for the benefit of the minor. Investments are not typically restricted or limited.
- Considerations: Once the child reaches the legal age of majority (18 or 21, depending on your state), they are the sole owner of the account. Investment earnings are subject to capital gains, and these accounts can trigger the kiddie tax.
4. Coverdell Education Savings Account (ESA)
- Purpose: Designed as a special account to be used towards K-12 and college educational expenses.
- Benefits: Tax-free growth and withdrawals for qualified educational expenses.
- Flexibility: Investments are typically not restricted or limited. There is no $10,000 spending limit on K-12 expenses.
- Considerations: Contributions are limited to only $2,000 per year, per child, and you must fall under specific income eligibility limits.
5. Other Lesser Used Options
- Roth IRA Accounts: While typically utilized & designed for retirement, you can use a Roth IRA account for qualified educational expenses. Contributions and earnings can be withdrawn tax-free for qualified educational expenses, subject to specific criteria.
- High-Yield Savings Account (HYSA) or CDs: Typically, these accounts are used for shorter-term savings or emergency funds. However, they can be used to save for educational expenses. Typically, they yield lower returns and do not provide specific benefits for educational spending.
- Prepaid Tuition Plans: Some states and universities offer prepaid tuition plans. Through these plans, you can lock in current tuition rates for future college attendance. However, those funds are usually restricted to certain states or schools.
Key Takeaway:
As we mentioned above, it’s never too early or too late to begin planning for your children or grandchildren’s education. Just as steady effort throughout the school year leads to success, consistent contributions can help build a strong financial foundation for a future education.
If you would like to review or discuss these options in more detail and tailor a savings strategy specific to your family’s educational goals, the Paradigm team is happy to help!