Saving for a Child's Education

It may seem like a long way off, but before you know it, the toddler playing in the dirt will be headed to college. With college costs rising all the time, saving for a child’s education should be a priority. Here are a few ideas that can help you get started.

529 College Savings Plans

Sponsored by states, state agencies and educational institutions, 529 plans are tax-advantaged savings plans designed to help parents, grandparents and others save for a child’s future education costs. There are two types of 529 plans.*

1. Prepaid Tuition Plans allow account holders to purchase credits at today’s prices toward future tuition and fees at participating institutions, generally, public in-state colleges and universities. Plans typically are sponsored by state governments.


2. Education Savings Plans allow parents, grandparents or others to open an investment account to save for a child’s qualified education expenses, including tuition and fees and room and board. Funds may be used at any college or university, or to pay tuition at a public or private elementary or secondary school if the state allows. Earnings used to pay education expenses generally aren’t subject to federal, and sometimes state, income tax. However, funds in a 529 plan might affect the student’s eligibility for need-based financial aid.

Annual Gift Tax Exclusion

The annual gift tax exclusion allows you to give $18,000 ($36,000 if your spouse joins in the gift) annually to as many beneficiaries as you choose without paying gift tax on the amount. Money can be used to pay education expenses, with no restrictions on how it is used. The exclusion amount is adjusted periodically.

Direct Gifts

Tuition payments can be made directly to an educational institution without being subject to gift tax or reducing the annual gift tax exclusion.

UTMA/UGMA Custodial Accounts

Assets saved in a custodial account remain under the control of a custodian until the child reaches a certain age (generally, 18, 21, or 25). While funds in the account may be intended for college expenses, there is no guarantee the child will use them for that purpose.

Your financial professional can help you create a college saving strategy.

*Certain requirements may apply. Before investing, read the program offering statement and consider the investment objectives, risks, charges, and expenses associated with 529 plans. 529 Plans are not guaranteed by any state or federal agency. Consider whether the investor’s or beneficiary’s home state offers 529 plan-related tax or other benefits. Discuss 529 tax rules with a tax professional.