What Every Parent Should Know About College Savings Plans (529s, prepaid plans, etc)

Saving for your child's college can feel overwhelming. However, college savings plans, like 529s and prepaid tuition plans, offer tax benefits to help you prepare. As a parent, understanding these options can help you build a financial foundation for your child’s future. Here’s a concise guide to what you need to know about 529 savings plans, prepaid tuition plans, and other alternatives.

1. 529 Savings Plans

These state-run accounts grow tax-free for education costs.

• Use Cases: College, vocational programs, K-12 tuition (up to $10,000/year), computers, internet.

• Why Use It: Tax-free withdrawals, flexible beneficiary changes, state tax deductions (varies by state; not applicable in CA, TX, or FL).

• Why You Might Not: Can only be used for specific education expenses; fewer investment choices.

• When to Choose It: Choose a 529 if you want to fund college or other education. It offers flexibility and Roth IRA rollover options. Avoid it if you’re unsure about your child’s college plans.

2. Prepaid Tuition Plans

Pay today’s tuition rates for future college costs.

• Use Cases: Tuition and fees at participating in-state public or private colleges.

• Why Use It: Locks in current rates to beat tuition hikes; some plans refund unused funds.

• Why You Might Not: Tied to specific schools; less flexible than 529 savings.

• When to Choose It: Pick prepaid if you're sure your child will go to an in-state public or participating private college. But skip it if you want flexibility for out-of-state options or other paths.

3. Coverdell ESAs

These accounts offer tax-free growth for those who can only chip in a little for education expenses.

• Use Cases: K-12 or college costs, up to $2,000/year; grandparents or others want to contribute to a shared bucket.

• Why Use It: Tax-free withdrawals for a wide range of education expenses, including K-12.

• Why You Might Not: Income limits restrict eligibility; low contribution cap.

• When to Choose It: Choose a Coverdell if you want to fund some college or K-12 costs and others like grandparents want to chip in, but avoid it if your income is too high or you need to save more.

4. UGMA/UTMA Accounts

Custodial accounts save for a child’s benefit with flexibility.

• Use Cases: Any expense benefiting the child, not just education.

• Why Use It: Highly flexible for education or other needs; no income restrictions.

• Why You Might Not: Earnings are taxable; child controls funds for their benefit at adulthood.

• When to Choose It: Choose UGMA/UTMA if you want flexibility. For instance, it can be used for house down payment instead. Avoid it if you prioritize tax-free education savings or are concerned your child might not use it wisely.

5. Brokerage Accounts

Standard investment accounts offer maximum flexibility.

• Use Cases: Any expense, including education, with no restrictions.

• Why Use It: Ultimate flexibility to invest in any asset; no contribution or income limits.

• Why You Might Not: All earnings are taxable; no tax-free withdrawals.

• When to Choose It: Choose a brokerage account for full control over your investments. If your goal is tax-advantaged education savings, then avoid this option.

• Pro Tip: If an account is in your child’s name, use the kiddie tax exclusion. In 2025, kids under 19 or students under 24 can earn up to $1,300 of unearned income tax-free.

6. Getting Started

To save effectively, start with a clear plan. Review your budget to see how much discretionary income you can put toward education savings each month. Decide if college is a definite goal or uncertain, and check if in-state schools align with your child’s aspirations. Think about your flexibility needs. 529s and Coverdells work well for education. UGMA/UTMA or brokerage accounts fit wider goals.

Recommendations:

• Start Small, Start Now: Even $50/month grows over time with compound interest.

• Choose the right plan for your family. Use 529s for college certainty, prepaid plans for in-state options, or brokerage accounts for more choices.

Have questions or need help getting started? Contact us at Galvez Financial for a personalized plan to secure your child’s future.