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How should I save or invest for my child’s future?

How should I save or invest for my child’s future?

July 14, 2023


Depending on your long term goals for your child, there are many ways to save and invest.  We’ve described four common ways to save for your child’s future, whether that’s for college, wedding, first vehicle, down payment on a first home, etc.  Each may have an advantage not highlighted here and an example of where it may be more advantageous to consider.  In the end, we’ve broken down the most common themes and uses of each account and how it applies to most people.


UTMA/UGMA Accounts

Why it’s popular:  Parents who don’t want to be limited to saving for education can take advantage of a lower tax rate on a portion of the earnings and allow their child to take control of the funds once he or she reaches adulthood

Is there an income limit to contribute? No

Is there a contribution limit? No

Are withdrawals taxable?  Yes

What is the impact on child’s ability to receive financial aid?  Significant.  Money in an UGMA or UTMA is considered an asset of the student and is factored into the Expected Family Contribution/Student Aid Index at a higher percentage.  This designation can work against your family when your child applies for financial aid.

Who controls the money in the account?  Beneficiary gains control at the age of majority, usually 18 or 21, depending on the state.

Can I change the beneficiary of the account?  No

Can I change the way the money is invested?  Yes

Final Thoughts:

Although UTMA’s/UGMA’s provide some benefits, based on the alternatives available today, this is a less than ideal strategy to save for your child’s future.  You lose complete control of the funds at the age of majority and at that time, the funds can be used at your child’s discretion whether you approve of the use or not. 


529 College Savings Plans

Why it’s popular:  Parents who want to keep control of the account and save money for their child’s college tuition and expenses and/or K-12 tuition can take advantage of federal and possible state tax benefits.  Tax-advantaged treatment applies to savings used for qualified education expenses.  State tax treatment varies.

Is there an income limit to contribute? No

Is there a contribution limit? There’s no annual limit on contributions.  Once the account value (including earnings) reaches $400,000-$550,000 (depending on the plan), no additional contributions can be made.

Are withdrawals taxable?  Not if used for qualified education expenses.

What is the impact on child’s ability to receive financial aid?  Limited, depending on who is the owner of the account.  Money in a 529 plan owned by the parent is considered a parental asset and is factored into the Expected Family Contribution/Student Aid Index determination at a lower percentage of 5.64%.

Who controls the money in the account?  Account owner (parent or grandparent) maintains control

Can I change the beneficiary of the account?  Yes

Can I change the way the money is invested?  Yes

Final Thoughts:

Today, 529 plans provide one of the best ways to save for your child’s future.  It provides a way to fund qualified education expenses through tax-free growth potential.  It provides flexibility in that anyone can contribute on holidays such as birthdays to assist paying for your child’s education.  Beginning in 2024, any unused funds (as long as the funds have been in the account for at least 5 years and the account has been opened for at least 15 years) can be converted to a Roth IRA tax free up to the annual contribution limits, up to $35,000 per beneficiary. You retain control of the funds and it can be a great estate planning tool used for multi-generational wealth transfer.


Coverdell Educational Savings Accounts (ESA)

Why it’s popular:  Parents who want to save money for their child’s education and expenses from kindergarten through college can take advantage of federal tax benefits.  Generally, the funds must be used for qualified education expenses by the time the child is 30.

Is there an income limit to contribute? Yes, your ability to contribute is phased out as your adjusted gross income increases.

Is there a contribution limit? The maximum annual contribution is $2,000 per year per beneficiary from all sources.

Are withdrawals taxable?  Not if used for qualified education expenses.

What is the impact on child’s ability to receive financial aid?  Limited, depending on who is the owner of the account.  If the owner is the parent, then 5.64% of the account value is counted against financial aid.

Who controls the money in the account?  Beneficiary of the account gains control at age 30

Can I change the beneficiary of the account?  Yes

Can I change the way the money is invested?  Yes

Final Thoughts:

Coverdell ESA’s were once great accounts that provided the flexibility to use for Private K-12 education expenses as well as for college.  The 2017 Tax Cuts and Jobs Act gave that same benefit to 529 Plans with up to $10,000/year.  Given the income restrictions, maximum contributions and the inability for family contributions, ESA’s are no longer necessary.


Parent Owned Accounts

Why it’s popular:  Parents who want to save money for their child but want to retain control of the funds and have flexibility on how the money is used.

Is there an income limit to contribute? No

Is there a contribution limit? No, but any funds given directly to the child from the account may be subject to the gift tax exclusion limit

Are withdrawals taxable?  Yes, realized capital gains and dividends are taxed annually to the account owner

What is the impact on child’s ability to receive financial aid?  Limited.  If the owner is the parent, then 5.64% of the account value is counted against financial aid.

Who controls the money in the account?  The account owner

Can I change the beneficiary of the account?  Yes, the account owner controls how the funds are distributed.

Can I change the way the money is invested?  Yes

Final Thoughts:

Parent owned accounts provide the most flexibility in terms of use of the funds as well as investment vehicles available.  Withdrawals are not subject to any penalties of any kind and can be used for college, new vehicles, weddings and down payment on a first home.  In exchange for this flexibility, you are subject to taxation and therefore should look at more tax-efficient vehicles such as ETF’s or low-turnover mutual funds.  Depending on the goal you’re trying to fund, some disbursements may be considered gifts, while others are considered expenses.  You’ll want to work with a professional on the best ways to cover those costs. 

While there are many savings options out there for your child’s future, 529 plans and Parent Owned Accounts are two of the best options available.  Whether you use one, the other or a combination of the two, starting as early as possible provides time and the power of compound interest to help you fund opportunities for your children in the future.  Want to know more about how much you should be savings each month?  Check out our College Foundation planning solution by clicking here