Investment and Savings Options for Your Child’s Future Education

As I’ve shared in previous newsletters, there are several ways to save and invest for your child’s future educational needs. Choosing the right option depends on your goals, flexibility needs, tax considerations, and how much control you want to maintain over the funds.

You may have heard discussion around the new Trump Account, which includes a government contribution of $1,000 for eligible children born between January 1, 2025, and December 31, 2028. Free money certainly catches people’s attention! However, before contributing additional funds to this type of account, it’s important to understand how it compares with other education savings options.

The Trump Account functions similarly to a retirement-style investment account for your child rather than a dedicated education account. Once your child reaches adulthood, the funds may generally be used for broader purposes but could have tax consequences depending on how distributions are taken. Because of this flexibility, it may not always be the best standalone solution for education funding.

529 Savings Plans

A 529 savings plan is specifically designed to help families save for educational expenses. Qualified uses include higher education expenses and, in some cases, K–12 tuition, apprenticeship programs, credentialing programs, and student loan repayment.

The major benefits include:

·      Tax-deferred investment growth

·      Tax-free withdrawals when used for qualified educational expenses

·      Parent (or donor) maintains control of the account

There are two types of 529 plans:

Education Savings Plans

These allow you to invest contributions and use the funds at most eligible educational institutions.

Prepaid Tuition Plans

These plans allow families to lock in tuition costs at current prices for participating schools.

Prepaid plans can offer predictability, but they also have limitations:

·      Generally, not available for K–12 expenses

·      Room and board expenses may not be included

·      Often limited to participating schools or state systems

·      Less flexibility if your child attends school out of state or receive scholarships

Some states offer hybrid approaches that combine prepaid tuition with investment features to cover additional expenses. Certain states may also provide state income tax benefits for contributions.

Contribution Considerations

There is no annual contribution limit for 529 plans themselves, but contributions may be subject to federal gift tax rules.

For 2026, the annual gift tax exclusion is $19,000 per recipient. A married couple could contribute up to $38,000 annually without triggering gift tax reporting requirements.

The current federal lifetime gift and estate tax exemption remains historically high, although rules may change in future years.

Another attractive feature of 529 plans is flexibility:

·      Beneficiaries can often be changed

·      Funds may be transferred to another qualifying family member

·      Student loan repayment may be allowed within limits

·      Unused funds may be eligible for rollover to a Roth IRA (currently up to $35,000 subject to IRS requirements)

Be mindful of annual maintenance fees and investment expenses. Choosing low-cost mutual funds or ETFs can help keep more of your money working toward future educational goals.

Custodial Accounts (UGMA/UTMA)

When my children were young, 529 plans were not widely available, so I chose custodial accounts. These accounts are opened in the child’s name with the parent acting as custodian. I invested primarily in mutual funds and occasionally individual stocks. I appreciated the flexibility because the funds could ultimately be used for the child’s benefit—not limited strictly to education.

However, there are tradeoffs. Once the child reaches the age of majority, the account legally becomes theirs to use however they choose.

Custodial accounts also receive different tax treatment:

·      Earnings are not tax-deferred

·      Withdrawals are not tax-free

·      Investment income may be subject to “kiddie tax” rules

For 2026, the first portion of a child’s unearned income receives favorable treatment, with amounts above certain thresholds taxed at higher rates.

Another important consideration is financial aid eligibility. Custodial accounts are generally treated as student assets, while 529 plans are typically considered parent assets.

As a general rule:

·      Parent assets may reduce aid eligibility by up to approximately 5.64%

·      Student assets may reduce aid eligibility by up to approximately 20%

Taxable Brokerage Accounts

Another option is to invest in a regular brokerage account in your own name.

Advantages include:

·      Full control over investments and withdrawals

·      Unlimited contribution amounts

·      Broad investment choices

Potential drawbacks:

·      Dividends and capital gains may be taxable annually

·      No education-specific tax benefits

·      Greater temptation to redirect funds toward other goals such as travel, lifestyle spending, or unexpected expenses

Final Thoughts

There is no one-size-fits-all answer when saving for your child’s future education.

The right choice depends on your goals, timeline, flexibility needs, tax situation, and overall financial priorities.

If you would like help evaluating your options, projecting future education costs, or creating a plan that fits your current budget, I would love to help. Together we can review the possibilities and determine what makes the most sense for your family today while preparing for tomorrow.