Where Should I Put My Money to Help My Child Save for College?

Jan 22, 2020 1:15:00 PM / by Jason Shaw

college savings

Saving for your child's college education can seem like an intimidating task. There are several options to help plan for this expense, but your financial situation will determine which one is best for you. We break down four different plans to help you select the one for you.

529 Plan

A 529 plan is one of the most popular tax-advantaged college savings plans available. Due to the flexibility of this plan, it can be applied to a variety of investors. Here's how: 

  • Tax-free growth and qualified withdrawals
  • There's no income or age limit to maintain the fund and make contributions
  • Funds can be applied at any eligible institution, which includes most accredited schools
  • Owners can use $10K/yr for K-12 tuition
  • Contributions to a 529 Plan are considered gifts, which are subject to gift tax exclusion ($17K/year for 2023)
  • Iowa 529 plan is a tax deduction for contributions (but no federal deduction).
    • Up to $3,785 per beneficiary account for each taxpayer for 2023
  • Withdrawals from non-qualified expenses are subject to income tax plus a 10% penalty
  • There's a minimal effect on financial aid eligibility

Coverdell ESAs

One of the biggest advantages of using a Coverdell ESA is that it can be used for elementary and secondary education expenses; not just higher education. Other advantages include: 

  • Tax-free growth and qualified withdrawals
  • Coverdell ESAs provide a broader range of investment options than 529 plans
  • Users can contribute up to $2K/yr total per beneficiary aged 18 or younger
    • Dependent on income (available only to taxpayers whose income falls within current limits)
  • A Coverdell ESA account must be distributed by the time the beneficiary reaches age 30 
    • An account can be transferred to another member of a beneficiary's family who is under the age of 30
  • Withdrawals exceeding qualified expenses subject to income tax plus a 10% penalty
  • There's a minimal effect on financial aid eligibility 

UTMA Custodial Account

UTMA (Uniform Transfer to Minors Act) Custodial Account is similar to most custodial accounts in that they're created and held by a custodian, often a parent until the child can gain access to the funds at age 21. Additional details of a UTMA Custodial Account are:

  • The beneficiary can't be changed 
  • Recipients can use funds for whatever they like
    • This can be an advantage if your child follows a less conventional path, such as attending a non-accredited school or training program or gaining real-world on-the-job experience through volunteer work/unpaid internships 
  • UTMA Custodial Accounts are counted as a child's asset which makes it harder to qualify for need-based financial aid 

Roth IRA

A Roth IRA is another tax-advantaged savings option. One of the biggest benefits of using a Roth IRA is you can take out funds tax and penalty-free before you reach age 59 ½ for qualified educational expenses (is still subjected to income tax). Roth IRA also allows you to: 

  • Decide how to use your funds since they stay in your name
  • Withdraw your Roth contributions at any time for any reason 
  • Create a flexible source of funds to supplement other college savings if needed
  • Contribution limits based on income

Consult a qualified financial planning professional to determine which plan or combination of plans is best for your family. A professional who specializes in both tax and financial planning can help you get the most out of your investments. For more financial planning tips, subscribe to our blog

Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.

Topics: Financial Planning

Written by Jason Shaw