Education Savings: There’s No Time Like the Present

By Bill Hansen, CFA®, CMT

Co-Chief Investment Officer, Principal

March 3, 2023

This time of year, it is always delightful to see signs popping up in the yards of various neighborhood kids and grandkids, announcing their graduations. I am one of those proud parents; our oldest is now 21 and will be a senior at Virginia Tech and my 18-year-old son is heading off to UNC Asheville this fall. It seems like just yesterday that we dropped him off for his first day of kindergarten. He looked so small walking in that big school with his little turtle backpack. Now they both tower over my wife and me at 6 feet, 2 inches! But I digress…


Let’s talk about saving to support loved ones who are eagerly climbing the educational ladder. Even if it’s not relevant for you at your current stage in life, I hope that perhaps you might send this on to family or friends who may find this information helpful.


There are two primary vehicles to save for education: Section 529 college savings plans (529 plans) and custodial accounts, otherwise known as Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts. There are also prepaid tuition plans and education IRAs/Coverdell accounts, but these are not as common. Like many people, you can use a combination of 529 plans and custodial accounts. Both types of accounts are typically funded by annual exclusion gifting from parents or grandparents. The annual exclusion gifting limit in 2023 is $17,000 per donor per recipient. This means you can give up to $17,000 per child each year without needing to file a gift tax return (or $34,000 per child when combined with your spouse). More important than which particular vehicle you decide to use, is that you start to save now and save regularly.


Saving for grandchildren’s educational expenses:

If you are a grandparent who’d like to help your grandchild, you can consider funding a 529 plan for them. If the account is in your name, it is not considered part of your grandchild’s assets for qualifying for financial aid. If there are excess funds left over after the beneficiary finishes their education, you can change the beneficiary to another family member, such as a younger sibling.


Also, with 529 plans there is an opportunity for five-year front-loading of gifts. Instead of contributing the annual exclusion amount to the grandchild’s 529 plan each year, you could make up to five years’ worth of gifts ($85,000, or $170,000 if combined with your spouse) all at once. This allows for the potential of more tax-free growth on the assets. If you were to die before the end of the five years, a pro rata share of the contributions would be brought back into your estate for purposes of calculating potential estate taxes. However, under current tax law, estate tax affects very few households.


Custodial accounts have more freedom of use and flexibility. They can be used for anything at any time, not just education expenses. Grandparents can gift appreciated stock and have the grandchild sell small portions at 0% capital gains tax. This is in contrast with 529 plan contributions, which can only be made in cash.


Saving for children’s educational expenses:

Ideally, parents should start saving for future educational needs as soon as their child is born. How much you need to save depends on a variety of assumptions, such as the current cost of education, the inflation rate of these costs and the rate of return on your education savings. For a child born today and attending UNC Chapel Hill at age 18, you would need to save about $577 per month until they begin college. [1]The key to success is to start saving early and regularly. The longer you wait, the harder it is to make up lost ground. For a 10-year-old, you would need to save $1,088 monthly under the same assumptions, which is nearly double.


Withdrawals are tax-free if used for education, including college, graduate studies, and up to $10,000 per child per year for elementary and secondary school or homeschooling expenses.

Assets are out of the account owner’s estate, but the owner retains control (you can change the beneficiary to another family member or withdraw assets, but withdrawals may have penalty and tax consequences if funds are not used for qualified education expenses).


Download our flyer on sample 529 plan totals depending on how much you save each month.


Keep in mind changes to 529 plans due to SECURE Act 2.0:

SECURE Act 2.0 passed in late 2022 now allows 529 account owners to roll 529 funds into a Roth IRA for the beneficiary of the account. However, this new freedom comes with several conditions:

  • Rollovers are limited to $35,000 in the beneficiary’s life.
  • The 529 plan must have been open for at least 15 years.
  • Contributions to the 529 plan made within the last five years, and earnings attributable to those contributions, are not eligible to be rolled over.
  • Annual Roth IRA contribution limits apply.


There’s an important caveat to that last bullet point. While contribution limits apply, earnings limits do not. Under normal circumstances, an individual with a modified adjusted gross income (MAGI) of $136,000 or a couple with MAGI of $228,000, would not be eligible to make a Roth IRA contribution because of income limitations. However, these limitations don’t apply to a direct rollover from a 529 plan, providing a new avenue for high income earners to get dollars into a Roth IRA.


Now what?

How will we adjust when our youngest leaves this fall? It will be bittersweet for us; we will miss both of our sons now in college and the house won’t be the same. But we’re happy that they’re entering a different phase of life and are excited to see where they end up.


Good luck, and as our son’s guidance counselor said, “It will all work out!”

[1] Assumes: $26,118 current annual education cost (tuition, books, fees, room & board); 5% annual inflation; 7% annual total return.

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