As the school year ends for kids across the country, educational expenses might not be top of mind. However, with college tuition costs rising each year, we would like to review some of the most effective options available for saving for your children’s and grandchildren’s education.

529 College Savings Plans: 529 plans are state-sponsored investment accounts that offer tax advantages for education savings. Typically, contributions per account are made up to the annual exclusion gift allowance, currently $18,000 per student, per year.  Contributions are allowed to grow income tax-free, and funds may be withdrawn tax-free for qualified education expenses. Some states offer a state income tax deduction on contributions and allow plan balances to be used for K-12 tuition in addition to traditional higher education expenses and certain apprenticeship programs. These plans, with their annual gift tax exclusion, can be excellent estate planning tools for grandparents as well. The ability to change plan beneficiaries or convert a portion of the plan balance to a Roth IRA adds flexibility that can be extremely beneficial to parents and grandparents saving for multiple children. For those individuals wishing to “kick start” education funding, a special 5-year “front-loading” ($18,000 x 5 = $90,000) per account is permitted gift tax free every 5 years.

Coverdell Education Savings Accounts (ESAs): Coverdell ESAs are trust or custodial accounts that provide tax-free growth and tax-free withdrawals for qualified education expenses, including K-12 and higher education costs. However, there are income limitations on who can open one of these accounts and the annual contribution is limited to $2,000 per beneficiary. These drawbacks have reduced the use of these plans significantly.

Custodial Accounts (UGMA/UTMA): Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts allow you to transfer assets to a minor without creating a trust. Counter to 529 plans, these accounts are not limited to only educational expenses; however, the assets will become the child’s property once they reach the age of majority, typically 18 or 21.

Traditional Savings Accounts and CDs: Regular savings accounts and certificates of deposit (CDs) are straightforward options. While they tend to offer lower returns compared to investment accounts, they are low-risk and provide easy access to funds when needed.

Trusts: Establishing a trust can provide greater control over how and when funds are distributed for education. Trusts can be tailored to meet specific goals and provide for various educational needs over time. However, creating and maintaining a Trust can be expensive. There are initial setup costs, which may include legal fees, ongoing administrative expenses, and trustee fees.

Choosing the right savings option depends on your individual financial situation and goals. An Eagle Ridge comprehensive financial plan can be an indispensable tool to help you save for the education of your children or grandchildren. If you have any questions or want to discuss these options further, please contact us.