When it comes to preparing for the future, few investments feel as important—or as daunting—as saving for a child’s college education. The rising cost of tuition, room and board, textbooks, and other qualified education expenses has made college savings plans more critical than ever. These plans are part of a broader category known as college savings accounts, which offer families multiple ways to plan and save for education. Fortunately, families today have a variety of smart, flexible strategies at their disposal to prepare financially for higher education, without sacrificing their own current financial situation or, importantly, jeopardizing their financial future in the process.
Whether you’re just welcoming a new baby or staring down the calendar toward high school graduation, understanding how different college savings options work (and which ones suit your family’s goals) can make a meaningful difference. As with any investment, starting earlier and choosing the right strategy thoughtfully can help families save—and even grow—their money over time, making college more affordable.
Why College Savings Plans Matter
It’s easy to assume you’ll figure it out later. Maybe your child will get scholarships. Maybe loans will bridge the gap. But the truth is that starting early, even with modest amounts, gives your savings time to grow and can dramatically reduce the need for student loans down the line.
Moreover, setting up a college savings plan doesn’t just help you prepare for costs; it also comes with financial and tax advantages you may not realize. For example, certain plans offer tax-free growth and tax-free withdrawals if the money is used for “qualified” education expenses. There are also other benefits, such as creditor protection or plan-specific perks, which can make these plans even more attractive. Others may reduce your state income tax liability or provide state benefits, such as tax deductions, credits, or in-state tuition advantages, depending on your state. And importantly, choosing the right type of savings plan can even help protect your student’s eligibility for federal financial aid.
Understanding Education Expenses
When planning, it’s important to have a clear understanding of what counts as education expenses. Qualified education expenses obviously include college tuition, but did you know that they can also include fees, room and board, and even certain costs for secondary education, such as private or religious school tuition. If your child is considering an apprenticeship program, some related expenses may also qualify, depending on the program and the savings plan you choose.
A 529 college savings plan is designed to help families save for a wide range of education expenses, offering tax advantages when funds are used for qualified education expenses. This can include not only postsecondary education costs but also up to $10,000 per year for K-12 tuition at eligible schools. Additionally, recent changes allow 529 plans to be used for student loan repayments and certain apprenticeship programs, expanding the flexibility of these accounts.
Navigating Your Options: Which Plan Is Right?
So, let’s begin with a plan you probably have heard of: the 529. This type of qualified tuition program is designed to help families save money for education expenses. These plans are typically sponsored by states, and it’s important to consider your own state’s qualified tuition program, as it may offer additional state-specific tax benefits or incentives.
529 College Savings Plans
529 college savings plans are among the most popular education savings tools for good reason. These plans allow families to contribute money that grows tax-deferred and can be withdrawn tax-free when used for qualified education expenses. Each plan is overseen by a program manager, who is responsible for the plan’s daily administration, investment oversight, and compliance with regulations. The account beneficiary (who can be any individual, regardless of age) can use the funds for a range of college expenses, including tuition, books, and other related costs.
But real flexibility lies in how they can be customized. You can typically choose from various investment portfolios—ranging from age-based funds that grow more conservative as your child nears college age, to custom mixes of mutual funds or ETFs. That said, investment options and rules vary by state, and contribution limits differ as well. Still, many families can take advantage of the annual gift tax exclusion (currently $19,000 per year per donor in 2025) to supercharge contributions without triggering a tax event.
Here’s a real-life scenario: Take Julia and Marcus, parents of a 2-year-old in Orlando. They opened a 529 plan shortly after their son was born, contributing $200 monthly. After a few years, they increased it to $300 and made use of a lump-sum deposit from a grandparent—well within the allowable gift tax exclusion. By the time their son enters college, they’re projected to have over $75,000 saved (tax-free!) assuming modest investment growth. Their accountant also helped them claim a state income tax deduction for contributions, making the plan even more beneficial.
Education Savings Accounts (Coverdell ESAs)
Another option, though less talked about today, is the Coverdell Education Savings Account. While the contribution limit is lower ($2,000 annually), it offers more flexibility on how the funds are used—not just for college, but for elementary or secondary education expenses as well. Coverdell ESAs can be used for secondary education expenses, including tuition and related costs at public, private, or religious schools. (By the way, there’s no limit to how many of these accounts can be created on behalf of a particular beneficiary.)
These accounts allow for a broader range of investment choices and are often used by families who want to cover private school tuition before college. However, there are income restrictions for contributors: single filers with a modified adjusted gross income above $110,000 and those married filing jointly with income above $220,000 are not eligible to contribute. So, it’s worth confirming eligibility before going this route.
Custodial Accounts and Traditional Savings
Custodial accounts, such as UTMA or UGMA accounts, are also often used to save for a child’s future. The funds can be used for anything that benefits the child, not just education. The custodian can withdraw money from the account as needed for the benefit of the child. That said, these accounts are considered the child’s assets, which can significantly affect financial aid calculations. Plus, unlike 529s, there are no special tax benefits for educational use, and income generated by the account may be subject to taxes.
Still, some families use custodial accounts in tandem with other savings tools. A parent might use a 529 for tuition and housing, while keeping a custodial account available for transportation, study abroad, or other non-qualified—but still education-related—expenses. If the account generates income, the minor may need to file a tax return and pay taxes on that income. (An accountant may be helpful to think through and strategize on such a path.)
Making Smart Investment Decisions
Choosing where to put your money is another important issue to consider. You need to purposefully select the right investments based on your goals, time horizon, and risk tolerance.
For example, younger families may feel comfortable with aggressive portfolios in the early years but gradually shifting to more conservative allocations as college nears. This strategy, known as glide path investing, is baked into many age-based 529 funds. However, some families prefer a hands-on approach and may opt to manually adjust their asset allocation over time.
Tip from the field: A family working with Walters Accounting wanted to understand how to balance risk in their child’s 529 account. Their CPA reviewed the fund’s performance, adjusted their allocations toward lower-risk bonds as college approached, and recommended pausing contributions temporarily to preserve liquidity during a job change for one of the parents. That kind of proactive monitoring helped them avoid losses during some market volatility and stay on track for their target savings amount.
Tax Perks Worth Knowing About
As we mentioned, one of the major advantages of 529 college savings plans is the tax treatment. Not only do your contributions grow tax-free, but qualified withdrawals (tuition, books, and certain off-campus housing) are also not taxed. Additionally, many states offer a tax deduction or credit for contributions to a 529 plan, though this depends on your residency and the specific plan.
It’s worth noting, however, that if you withdraw funds for non-qualified expenses, you may face income tax and a 10% penalty on the earnings portion, which can impact your federal taxes. That’s why it’s important to track what’s considered a qualified expense.
Who Controls the Funds?
With most college savings plans, especially 529s, the account owner (usually a parent or grandparent) retains full control of the funds. That includes the ability to change beneficiaries if one child doesn’t use the money or to redirect the funds if plans change altogether. In 2024, new rules even allowed for some unused 529 funds to be rolled into a Roth IRA for the beneficiary, another incentive for long-term planning.
This level of control contrasts sharply with custodial accounts, where the funds become the legal property of the child once they reach the age of majority.
Rules Around Contributions and Withdrawals
Contribution limits vary by state, but most 529 plans have very high maximums—some upwards of $350,000 or more per beneficiary. While these figures may seem out of reach for many families, they offer flexibility for those receiving large gifts from relatives or planning for graduate school.
Withdrawals, meanwhile, need to be matched to qualified education expenses to remain tax-free. If your student gets a scholarship, you can withdraw an equivalent amount from the 529 without penalty, though you’ll still owe income tax on earnings. That said, thoughtful planning (ideally with guidance from a CPA) can help you not get caught off guard when it’s time to access funds.
Account owners can also take advantage of the annual gift tax exclusion, allowing contributions up to $19,000 per year per donor (or $38,000 for married couples filing jointly) without triggering federal gift tax. For those looking to jumpstart their college savings, the IRS allows “accelerated gifting,” where you can contribute up to five years’ worth of the annual exclusion in a single year, potentially $95,000 per donor or $190,000 for married couples without incurring gift tax, provided no additional gifts are made to the same beneficiary during that five-year period.
Lastly, it’s key to keep track of your contributions to avoid exceeding your plan’s lifetime limit and to understand the tax benefits your state may offer, such as a state tax deduction or credit for 529 plan contributions.
The Financial Aid Factor
Now, let’s address the elephant in the room: how do college savings plans affect financial aid?
The answer depends largely on account ownership. When a 529 plan is owned by a parent, it’s reported as a parental asset on the FAFSA, which has a relatively small impact on aid eligibility. In contrast, accounts owned by students or non-parent relatives may carry a larger weight—or be counted as student income if withdrawals are used in the wrong year. In addition to savings plans, financial aid and scholarships can also play a major role in covering education costs.
Strategy example: A high school junior named Lawrence was preparing for college with help from both parents and a generous aunt who had opened a separate 529 plan for him. However, the family’s financial advisor warned that distributions from the aunt’s account could count as untaxed income for Lawrence, reducing his financial aid eligibility the following year. By coordinating the timing of withdrawals, they were able to minimize the impact and preserve grant eligibility.
Keep It Flexible: Monitoring and Adjusting
College savings (like other forms of investing for future needs) isn’t a “set it and forget it” kind of thing. Life changes. Incomes rise or fall. A child’s college plans evolve. That’s why it’s important to check in on your savings progress regularly, such as once or twice a year.
Consider using a college savings calculator to see if you’re on pace. You might realize that increasing contributions by just $50 a month could close a looming gap. Or that you’ve been too conservative with investments and need to pivot now while there’s still time.
Even better? Sit down with your accountant to review where things stand. At Walters Accounting, for example, we’ve worked with clients to align their education savings strategy with broader financial planning goals, everything from timing real estate sales to optimizing for capital gains and gift taxes.
And by starting early, and reviewing your strategy regularly, you can build a savings plan that supports your child’s dreams without compromising your own financial security.
