Plan ahead for the places they'll go...
College costs continue to rise, and the value of planning ahead remains significant. Education continues to have a meaningful impact on earning potential: recent Bureau of Labor Statistics data shows that full-time workers with at least a bachelor's degree earn roughly 78% more per week than workers with only a high school diploma, and college graduates also tend to experience lower unemployment. more info
While college costs are still increasing, the rate of increase has moderated from the unusually high education-inflation assumptions we used in years past. For the 2025–26 school year, average published tuition and fees rose 2.9% at public four-year colleges and 4.0% at private nonprofit colleges. The average annual student budget is now approximately $31,000 for an in-state public four-year college and more than $65,000 for a private nonprofit college, before considering financial aid. more info
This is why starting early and maintaining a steady investment strategy can make such a difference in your child's future. If you have generous relatives who want to participate, even better. If you don't, we can still develop a realistic strategy to help you work toward your goals.
Ask me to run a college calculation for your child based on the costs of a particular school you hope they attend, or we can use national averages and build in reasonable assumptions for future college-cost inflation.
What is a 529 Savings Plan and do we have to spend it on college?
Named after Section 529 of the Internal Revenue Code, 529 savings plans provide a tax-advantaged way to save for qualified education expenses. All of the interest earned in a 529 is exempt from Federal Taxation as long as the funds are spent on education. The laws were changed in 2018 to show that K-12 education expenses may also be federally tax free distributions. California currently does not allow for state tax avoidance on distributions. California currently does allow for distributions for K-12 expenses, however - the state may apply a 2.5% penalty on K-12 distributions while if withdrawn to cover higher education expenses, there is no such penalty, just state taxes for your effective rate. Anyone may contribute to the 529 plan for your child, so these accounts make Grandparent gifting easy. If your child gets a scholarship, the penalty is waived for any funds not used for education or 529’s can always be transferred to another child, or back to the parents for their higher education expense coverage.
529’s can be invested in mutual funds only. The asset is never owned by the child, always controlled by the parent and an asset of the parent’s. It counts less against FAFSA than the following option, but the limitation herein is that funds need to go to higher education (or caveats mentioned) or withdrawals will be penalized by your state and the IRS.
What are my other options that don’t require me to spend it on college?
We can also open a UGMA/UTMA account for your child(ren). This is a Uniform Gift/ Trust Minor Account, and it can hold individual stocks and bonds as well as mutual funds and other investments. The focus of the account is to spend it on the betterment or enrichment of the child’s life. This has some tax advantages as well. The taxes on dividends and capital gains are often less here than the same account in the parent’s name.
A creative way to work with accounts like this is to have the parents / grandparents / anyone willing, to gift securities to this UTMA account over the child’s life., then it is just a transfer of securities and the giftee or recipient doesn’t pay taxes on receipt of the gift, nor would the donor. The current lifetime maximum is $15 Million per donor - that can be split over one year or 50, - over one recipient or more as long as you don’t exceed giving that out in your living years. The minor will inherit the cost basis from the giftors (amount they paid for the stock) however, depdending on their own income level when they cash out the stock, there may be favorable tax treatment for htem.
And lastly, this type of account establishment starts your child off in life with a little more financial literacy, one of my favorite pursuits. My goal and hope is that they will carry this through their life, always with an understanding that they create and build wealth by investing.
Disclosures & Taxation
Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other education expenses or that a beneficiary will be admitted to or permitted to continue to attend an educational institution. Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals.
An investor should consider, before investing, whether the investor's or designated beneficiary’s home state offers any favorable state tax treatment or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan. Furthermore, the Tax Cuts and Jobs Act that was signed into law on December 22, 2017 allows for up to $10,000 a year per beneficiary in tax free distributions from a 529 Plan if used for tuition incurred for enrollment or attendance at a public, private, or religious elementary or secondary school. Check with your state’s guidelines prior to withdrawing the funds.
For more complete information, including a description of fees, expenses and risks, see the offering statement or program description.