With college costs continuing to rise and new savings vehicles entering the market, families face increasingly complex decisions about funding education. While 529 plans remain the most popular choice, recent legislative changes and evolving financial aid rules mean it's worth taking a fresh look at your education savings strategy.
Whether you're just starting to save for a newborn or your child or grandchild is approaching high school, understanding your options can help you make more informed decisions that align with your broader financial goals.
The 529 Foundation: Still the Gold Standard
529 education savings plans continue to offer strong advantages for most families:
- Tax Benefits: Contributions grow tax-free, and withdrawals for qualified education expenses are also tax-free. Many states offer additional tax deductions or credits for contributions.
- Flexibility: Recent changes have expanded what qualifies as education expenses, including K-12 tuition (up to $10,000 per year), apprenticeship programs, and student loan repayments (up to $10,000 lifetime).
- Control: Unlike custodial accounts, 529 plans remain under parental control even when the child reaches adulthood.
- High Contribution Limits: Most plans allow total contributions exceeding $300,000 per beneficiary.
Strategic 529 Timing
The timing of contributions and withdrawals can significantly impact your tax efficiency:
- Front-loading: You can contribute up to five years' worth of annual gift tax exclusions upfront without triggering gift tax implications. 2025 gifting limits are $19,000, which results in up to $190,000 that can be funded by two parents or grandparents in the first year.
- End-of-year contributions: Making contributions by December 31st can maximize state tax benefits for the current year.
- Withdrawal timing: Coordinate withdrawals with tuition payments to ensure expenses occur in the same tax year.
Beyond 529s: other education funding options
Uniform Transfer to Minors Accounts (UTMAs)
UTMA accounts offer additional investment flexibility compared to most other options, and can be used for any expense that benefits the child - not just education. However, they come with important trade-offs: the funds become the child's property at the age of majority (18-25, depending on your state), and they're considered the student's asset for financial aid purposes, which can potentially reduce aid eligibility. UTMA accounts may not provide the tax advantages of dedicated education savings vehicles, making them most suitable when you want maximum flexibility.
Coverdell Education Savings Accounts (ESAs)
ESAs have a much lower annual contribution limit ($2,000) compared to 529 plans, but they offer two potential advantages: you typically have more investment choices, and you can use the funds for any K-12 education expenses without limits (whereas 529 plans cap K-12 tuition at $10,000 per year).
Traditional Savings and Investment Accounts
For families who want additional flexibility or have already funded other options, taxable accounts provide a high level of choice over investments and withdrawals, though without the tax advantages of dedicated education accounts.
Trump Accounts: The New Option
As discussed in our July newsletter, these new custodial accounts expected to launch in 2026 offer $1,000 in federal seed money for children born between 2025-2028. These accounts have contribution limits of $5,000, grow tax-deferred, and should be able to be used tax free for qualifying expenses like higher education, a first-time home purchase, or starting a business. While they allow education withdrawals, the complex tax rules and limited benefits may make them better suited as a supplement rather than a primary education savings vehicle.
Custodial Roth IRAs
If your child has earned income, a custodial Roth IRA can serve dual purposes. While primarily a retirement vehicle, Roth IRA contributions can be withdrawn penalty-free for education expenses. This gives you flexibility if your child doesn't attend college or receives scholarships.
Financial Aid Considerations
Your choice of savings vehicle can impact financial aid eligibility:
- 529 plans owned by parents: Assessed at 5.64% of asset value in financial aid calculations
- Custodial accounts: Assessed at 20% of asset value, impacting aid eligibility
- Grandparent-owned 529s: Don't count as assets in aid calculations, but distributions count as student income
Grandparent Strategy
Grandparents who want to help can help maximize impact by:
- Contributing to parent-owned 529 plans during early years
- Utilizing grandparent-owned plans to maintain control
- Timing distributions for the child's junior and senior years to potentially minimize aid impact
Creating Your Education Funding Strategy
Step 1: Estimate Costs
Start with realistic projections. Current average annual costs range from ~$25,000 for state schools, ~$40,000 for UC schools, and ~$60,000+ for private colleges. Factor in inflation, but remember that partial funding combined with other sources can be highly effective.
Step 2: Determine Your Capacity
Consider your overall financial picture. Education funding shouldn't compromise retirement savings or emergency reserves. A common approach is to fund two-thirds to three-quarters of projected costs, with the remainder coming from current income, student loans, and scholarships.
Step 3: Choose Your Vehicle Mix
Many families benefit from a primary 529 plan supplemented by other options:
- 529 plan: For the majority of savings
- Roth IRA: If the child has earned income
- Taxable accounts: For flexibility
Step 4: Automate and Adjust
Set up automatic contributions to maintain consistency. Review and adjust your strategy annually, especially as your child approaches college age and your financial situation evolves.
Common Mistakes to Avoid
Over-saving in 529s: While 529 plans offer flexibility, having too much in education-specific accounts can create challenges if plans change or the student receives a meaningful level of financial aid.
Ignoring state benefits: Many states offer tax deductions for 529 contributions, but you typically need to use your home state's plan to receive them.
Poor investment allocation: Many families choose overly conservative investments, reducing growth potential over long time horizons.
Forgetting about scholarships: Merit-based aid can significantly reduce costs, but 529 plans allow penalty-free withdrawals of excess funds up to scholarship amounts.
The Bottom Line
Effective education planning requires balancing multiple factors: tax efficiency, financial aid impact, investment growth potential, and family flexibility needs. While 529 plans remain the cornerstone for most families, the optimal strategy could involve multiple vehicles working together.
The key is starting early, contributing consistently, and adjusting your approach as circumstances change. With thoughtful planning, you can build a strategy that supports your child's education while maintaining your broader financial health.
Remember, education funding is just one component of your overall financial plan. The most effective approaches integrate education savings with retirement planning, tax strategy, and estate planning to create a comprehensive approach that serves your family's long-term interests.
Want to discuss your unique situation? Contact us today.
--
This content is provided for educational purposes only, represents only a summary of topics discussed, does not constitute any personalized investment advice or recommendation, and represents only the views and opinions of the speakers which are subject to change without notice. Investing involves risk including the potential loss of all amounts invested.
This material prepared by Certus Wealth Management, LLC (“Certus Wealth”) is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Opinions expressed by Certus Wealth are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Certus Wealth, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Certus Wealth does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice.
