School may be out for summer, but saving for education should always be on the books. Whether you’re already a parent or starting to plan ahead, the cost of higher education can be a looming financial burden. While universities aren’t the only option—trade schools and community colleges are also fantastic choices—they still aren’t free. According to a study from NerdWallet, 20% of parents of children under 18 say they haven’t yet started saving for their children’s college education, but they want to. With so many different options, trying to find the right account for your family can be overwhelming. That’s why we’ve put together this article to help you start saving for college!
Account options
529 Education Savings Plan
There are a ton of account options available to start saving for college or other education needs. The most common type of account is a 529 Education Savings Plan. Unlike a traditional savings account, a 529 is an investment account that offers tax benefits while you save for education. 529 plans are a great option if you’re interested in saving for education expenses specifically—money from these accounts can pay for tuition at any qualified college and university in the country, including vocational or technical schools and graduate programs. Plus, you can use up to $10,000 per year to pay for kindergarten through 12th grade tuition-related expenses at both public and private schools. Another benefit is that qualified withdrawals from your 529 plan aren’t subject to federal income tax. Should your child change their education plans or not need all of the money in the account, funds can be transferred to another qualifying 529 account. Starting in 2024, a lifetime limit of $35,000 can be transferred after 15 years to the beneficiary’s Roth IRA.
Coverdell Education Savings Account
Coverdell Education Savings Accounts (ESA) are also worth a look. Similar to a 529 plan, ESAs offer tax-free investment growth and tax-free withdrawals when the funds are spent on qualified education expenses. One key difference is that while 529 plans only allow withdrawals for tuition-related expenses, an ESA can pay for other expenses like books and school supplies, as well as academic tutoring. Additionally, ESAs are only available to families below a specified income level—$110,000 for individuals and $220,000 for married couples filing jointly—so they also have a lower contribution limit per child. However, ESAs offer more flexibility in how you invest your funds, including self-directed investments. ESA funds must be used or transferred by age 30 or are subject tax penalties unless the beneficiary has special needs.
Uniform Transfers to Minors Act
The next type of account you may consider is called a Uniform Transfers to Minors Act (UTMA). An extension of the Uniform Gift to Minors Act, UTMA accounts allow a minor to receive gifts without the need for a guardian or trustee. UTMA accounts are beneficial because they allow your child to save and invest their money without any of the tax burdens until they reach the legal age for the state in which the account is set up. In Georgia, the age of termination for these accounts is 21. However, there are limits for avoiding tax consequences—the IRS allows for an exclusion from the gift tax of up to $18,000 per person for 2024.
To save for college or other future expenses, the donor names a custodian, who has the fiduciary duty to manage and invest the property on behalf of the minor until they become of legal age. One of the biggest benefits of UTMA is that it extends the original definition of gifts beyond cash and securities to include real estate, paintings, royalties, and patents. This means money can be invested with more options compared to a 529, and there are fewer restrictions on withdrawals. It’s important to note that overall, the money belongs to the minor, which limits who can withdraw from the account and could potentially impact the financial aid they receive. Earnings generated within a UTMA are taxed at the kiddie tax rate by the IRS up to the allotted threshold of $2,500, after which earnings are taxed at the adult donor’s marginal tax rate.
Standard brokerage account
Maybe you’re interested in investing but want to have control over the account and more flexible withdrawal options. If so, you’ll likely be interested in a standard brokerage account, which can be opened individually or jointly by two or more people. Like a UTMA account, a standard brokerage account offers various investment opportunities, including stocks, bonds, exchange-traded funds, and more. Unlike a UTMA, whoever opens the account retains ownership and is responsible for taxes. Additionally, there are no limits on how much money you can contribute, and money can be withdrawn at any time for any reason, though you may incur tax penalties.
Roth IRA
Another option for education savings is a Roth IRA, which is a retirement account that allows earnings to grow tax-free. To start a Roth IRA, your kid either has to have earned income, like from a summer job, or you can create a custodial Roth IRA. While withdrawing from your Roth before retirement typically incurs penalties, withdrawing for qualified education expenses is one of the few tax-free options. One benefit of an IRA is that there are more investment options, allowing you to potentially grow your account easier than with a 529, for example. Plus, if you don’t use the expenses for education, you and your kid have a head start on retirement planning. Contributions are limited to $7,000 in 2024 ($8,000 if age 50 or older), which may not be enough overall for education expenses. There are also income restrictions, and your contributions can’t exceed your earned income.
Certificate of deposit
If you’re looking for more savings-type accounts than investments, look into a certificate of deposit (CD). Issued by a credit union or bank, CDs allow you to set money aside for a specific time-frame at a fixed interest rate, and you’re typically unable to access the funds early without penalty. CDs are backed by the National Credit Union Administration (NCUA) or the Federal Deposit Insurance Company (FDIC) depending on the issuing institution, which means your money is protected up to $250,000. The biggest risk with CDs is interest rate—as the financial markets fluctuate in response to economic and political factors, you want your CD’s rate of return to remain competitive. If rates rise, your current investments could be locked into a lower rate for an extended period. While you don’t risk losing your investment and earned interest, you could miss the opportunity to earn more money than with your current CD.
Savings bond
The last way we’ll discuss saving for college is through buying U.S. savings bonds. Backed by the Department of Treasury, bonds are a low-risk investment, though they typically provide minimal returns. The government currently offers two types of bonds: EE bonds and I bonds. EE bonds have a fixed interest rate that remains the same for at least the first 20 years. I bonds earn a rate that can change every 6 months. Both types of bonds are federally tax-deferred and state tax-free, and may be used tax-free for qualified higher education expenses. Similar to other accounts, you can only invest $10,000 ($20,000 as a married couple) per year, per owner, per type of bond.
How to choose an account
We’ve covered a lot of account options, so now you’re wondering how to figure out which one is best for you. While only you can decide what works for you and your family, here are a few considerations:
- Do you want the funds to go specifically towards education expenses, or do you want more flexibility?
- Who do you want to control and/or access the account? Is this an individual or joint venture?
- What is your income?
- What is your timeline?
- What are the potential tax benefits or penalties?
While you want to start saving as early as possible, take time to consider all your options and understand the pros and cons of each.
How much to save for college
There are a few things to consider when deciding what your financial savings goal may be. Two of the most important will be your timeline and the cost of education.
According to a recent study from CollegeBoard, the average cost of attendance at a public, four-year university is $28,840 in state and $46,730 out of state. If you’re interested in a private, four-year university, tuition is around $60,000. These figures include tuition and fees, housing and food, books and supplies, transportation, and other personal expenses for full-time undergraduate students.
If your child is already in high school, you may want to take a stronger approach to saving—this could be more money contributed each time, an aggressive investment strategy, or both. However, if your kid is still in kindergarten, you don’t necessarily need to save as much, as quickly. It’s important to remember, though, the numbers above don’t account for inflation, so if you’re thinking a decade ahead, you’ll likely want to save even more.
Other considerations
One of the best things you can you do for your children is instilling good financial habits early. Kids are always watching, so do your best to lead by example by following a budget and building an emergency fund. Start discussing finances with them early and in ways they can understand. You also want to be sure you’re saving for your own retirement. Paying for your kid’s education is an amazing gift, but setting them up for future financial success with good habits and not passing on debt is an even better one.
Key takeaways:
- If you’re interested in saving for education-related expenses specifically, consider a 529 Savings Plan or a Cordell Education Savings Account. If you’re interested in saving with more flexible options, consider a brokerage account, an IRA, a CD, or buy savings bonds.
- Setting a good financial example goes a long way, so set yourself up for success with an emergency fund and retirement accounts.
With all the options available to save for your child’s future education expenses, the best thing you can do is research all available alternatives and see what aligns best with your needs—and start saving as soon as possible. Even a small amount can help you lessen the financial burden down the line.
Still not sure what’s best for you? Our team of financial professionals are available to help you determine your best options!
