Clients often ask us how to begin investing for their kids or grandkids. As always, starting early pays the greatest benefits. Here are two ideas to consider:
529 Plans allow you to invest cash for school expenses. The 529 account grows tax free, and money taken out for qualified education expenses is not taxed. These accounts are typically owned by a single parent, with one beneficiary. They are state-specific and can accept high contributions.
- Almost all states offer income tax deductions for contributions to their state 529 plans. Some states offer tax breaks for investing in any state’s 529 plan.
- Not all plans are created equal, with investment choices limited to that plan’s fund lineup. Most plans offer target-date funds which are a good idea to align with HS graduation.
- The definition of qualified education expense has broadened over the years. Beginning in 2026, $20k in annual distributions are allowed for K-12. Other qualifying expenses include college apps, housing, and even exam-prep and computers.
- Beneficiaries can be changed to other family members.
- Once a 529 account has been open for 15 years, unused funds up to $35K can be rolled into a Roth IRA for the beneficiary (subject to annual Roth eligibility and contribution limits).
UTMA (Custodial) Accounts are irrevocable gifts to a minor. These accounts can accept not only cash, but gifted securities as well. Minors have very low tax brackets which enable some gains to be realized tax free, or at a very low rate.
- Funds can be used for almost anything for the benefit of the child, including cars, extracurricular activities, travel and Greek life.
- This can be a great tool for gifting appreciated stocks or mutual funds, selling with minimal taxes and using the proceeds to cover those athletic or extra-curricular activities.
- Grandparents and others can directly gift to these accounts!
- UTMAs are considered assets of the child and can decrease financial aid eligibility.
Parents often pair a 529 plan with a UTMA, to take advantage of the features and uses of both.
