College Savings: Think beyond 529 plans.

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If you’re going to save for college, it’s best to start early and have a 529 plan.

We all want what’s best for our kids. Which is why you’re here, reading about saving for college. The cost of college has been rising steadily for decades, and it shows no signs of slowing down. In fact, the average cost of tuition and fees at a private four-year college in the United States is now over $38,000 per year.

Saving for your child's education is important for a number of reasons:

  • To reduce the amount of student loan debt that your child will have to take on. According to the Federal Reserve, the average student loan debt for a recent college graduate is now over $30,000. This debt can be a major burden.
  • To give your child more education options. Without financial support from their parents, many students are forced to choose less expensive schools or to work part-time while they are in school. This can make it difficult for them to focus on their studies and graduate on time.
  • To provide your child with a financial head start in life. A college degree can lead to higher earnings and a better quality of life. By saving for your child's education, you can help them to achieve their full potential.

When should I start saving for my child's education?

The earlier you start saving for your child's education, the better. This is because compound interest can help your savings grow over time. Compound interest is interest that is earned on both the principal amount and the accumulated interest from previous periods.

For example, if you invest $1,000 at a 5% interest rate, you will earn $50 in interest in the first year. In the second year, you will earn interest on both the original $1,000 principal amount and the $50 in interest that you earned in the first year. This means that you will earn $52.50 in interest in the second year, and your balance will grow to $1,102.50.

As you can see, your balance is growing at an accelerating rate each year. Thank you compound interest!

How can I save for my child's education?

There are a number of different ways to save for your child's education. Some of the most popular options include:

  • 529 plans: 529 plans are tax-advantaged savings plans that are specifically designed for education expenses. Contributions to 529 plans grow tax-free, and withdrawals are also tax-free as long as they are used for qualified education expenses. The contribution limit for 2023 is $17,000 per individual (i.e. if you are saving for two kids, you can contribute $17k to each 529 plan).

There is also the ability to accelerate contributions to your 529. You can make higher contributions (up to $170,000) without being subject to gift tax (gift tax return is still required). This is called “superfunding”, and can help accelerate five years’ worth of contributions to the current year.

  • Coverdell ESAs: Coverdell ESAs are another type of tax-advantaged savings plan that can be used for education expenses. Coverdell ESAs have a lower contribution limit than 529 plans, but they offer more flexibility in terms of how the money can be used. The limit is up to $2000—but is reduced for families with higher household income (incomes above $220k are ineligible).
  • UTMA/UGMA accounts: UTMA/UGMA accounts are custodial accounts that can be used for any purpose, including education expenses. Contributions to UTMA/UGMA accounts are not tax-advantaged, but the earnings on the accounts grow tax-free until your child reaches the age of majority. These are irrevocable and considered the property of your child.
  • Roth IRAs: Roth IRAs are retirement savings accounts that can also be used for education expenses. Contributions to Roth IRAs must be made with after-tax dollars, but the earnings on the accounts grow tax-free and can be withdrawn tax-free in retirement.

The best way to save for your child's education will depend on your individual circumstances and financial goals. It’s important to do your research and to speak with a financial advisor to determine which option is right for you.

What Can a 529 plan be used for?

Tuition and Fees. 529 plans are primarily designed to cover qualified higher education expenses. This includes tuition and mandatory fees at eligible institutions.

Room and Board. The funds can be used for room and board, whether the student lives on or off-campus. However, there are limitations, and the expenses must not exceed the institution's estimated cost of living.

Books and Supplies. Money from a 529 plan can be used to purchase required books, supplies, and equipment.

Computer Technology. In the digital age, 529 funds can cover expenses related to purchasing a computer and internet access, as long as they are used primarily for the beneficiary's educational needs.

Special Needs Services. If the beneficiary has special needs, certain expenses, such as tutoring and other special education services, may be covered.

And as importantly, what does not qualify for 529 expenses?

Non-Qualified Expenses. Using 529 funds for non-qualified expenses may incur taxes and penalties. This includes things like transportation, insurance, and extracurricular activities (Spring Break!).

Primary and Secondary Education. As of the latest regulations, 529 plans are generally reserved for post-secondary education. However, recent changes allow for limited use for K-12 expenses, subject to certain restrictions.

How do you access your 529 funds when ready?

  1. Contact your 529 plan administrator. The first step is to reach out to the administrator of your specific 529 plan. They will provide you with the necessary information and forms to initiate a withdrawal request.
  2. Submit a withdrawal request. Once you've contacted the administrator, you'll need to submit a withdrawal request form. This form typically requires details such as your account number, beneficiary information, and the amount you wish to withdraw.
  3. Choose the withdrawal method. You can usually choose between two primary methods for receiving your 529 plan funds: electronic transfer or check.
  4. Specify the payment recipient. Decide whether you want the funds to be sent directly to the educational institution or to yourself. If you choose the latter option, you'll have to make the payment to the school yourself.
  5. Allow sufficient processing time: Processing times for withdrawal requests vary depending on the specific plan, but it generally takes a few business days for the funds to be disbursed. Plan accordingly to ensure timely payment of educational expenses.
  6. Keep track of expenses. Remember to keep track of your 529 plan withdrawals and ensure they align with qualified educational expenses. Document what the funds were spent on in order to avoid being taxes on non-qualified expenses. This will help you avoid any potential tax implications.

What if my kids don’t go to college!?

First, no worries. Kids will all find their own path. What we’re talking about here is what happens to your 529 Plan if it’s not used for education? You have a few options if this is the case.

Change the beneficiary: You can change the beneficiary of your 529 plan to another family member, such as a sibling, grandchild, niece, or nephew. The new beneficiary can then use the funds for their qualified education expenses while avoiding the tax penalty.

Withdraw the funds: You can also withdraw the funds from the 529 plan, but you will have to pay taxes and penalties on the earnings portion of the withdrawal. The tax rate will be your child's tax rate, which is likely to be low. The penalty will be 10%, but it will only apply to the earnings portion of the withdrawal, not the original amount you contributed to the plan.

Roll over the funds to a Roth IRA: Starting in 2024, you will be able to roll over unused 529 plan funds to a Roth IRA for the same 529 plan beneficiary without incurring any penalty on the earnings. This can be a good option if your child is already done with their education or does not plan to pursue higher education.

Final tips for saving for your child's education.

In conclusion, here are some tips for saving towards your child’s education.

Start early. The earlier you start saving, the more time your money has to grow.

Set a goal. Determine how much money you need to save for your child's education. This will help you to create a savings plan. Our advisors can help with this.

Automate your savings. Set up a recurring transfer from your checking account to your savings account each month. This will help you to save money without even having to think about it.

Invest your savings. Once you have saved some money, you can start to invest it. This will help your money to grow faster than leaving it in a low interest savings account.

Review your plan regularly. As your financial situation changes, review your savings plan and make adjustments as needed. Keep track of higher education costs and adapt as needed.

Saving for your child’s education is an important piece of wealth management. While most people go with a 529, you may want to consider diversifying where and how you are saving in order to potentially cover some of the expenses that do not qualify for 529.


How can I set up my child for financial success?

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