Saving for college is a significant financial challenge for many families. Fortunately, there are tax-advantaged strategies to help you maximize these savings.
Navigating the complexities of these plans, tax benefits, and investment strategies can take time, effort, and expertise.
Let’s explore how a financial advisor can help you understand and leverage tax benefits for college savings.
Understand the tax benefits of college savings plans
Saving for college often involves taking advantage of tax-advantaged accounts, such as 529 plans or Coverdell Education Savings Accounts (ESAs). Each option comes with specific rules, tax benefits, and contribution limits.
529 plans: These state-sponsored plans allow your contributions to grow tax-free, and withdrawals for qualified education expenses are also tax-free. In some states, you may also qualify for a state income tax deduction or credit for contributions.
Coverdell ESAs: While contributions are limited to $2,000 annually per child, these accounts also grow tax-free and allow funds to be used for K-12 expenses and college.
Each option has unique rules that can be difficult to navigate. For instance, 529 plans may have varying state tax benefits, contribution limits, or restrictions on how the funds can be used.
Customize your savings strategy
A financial advisor doesn’t just recommend which savings vehicle to use—they also help create a strategy tailored to your family’s goals, budget, and timeline.
Some families prioritize maximizing tax benefits by contributing the maximum annual amount to a 529 plan. Others may want to balance college savings with other goals, like retirement.
Overfunding a 529 plan can result in penalties if the funds aren’t used for qualified expenses, while underfunding might lead to taking on debt.
Take advantage of gift tax exclusions
Many families aren’t aware that 529 plans can also serve as powerful estate planning tools. Contributions to a 529 plan qualify for the annual gift tax exclusion, which in 2024 is $18,000 per year per beneficiary. Married couples can contribute up to $36,000 annually without incurring gift taxes.
You can use a special provision to “superfund” a 529 plan by contributing up to five years’ worth of gift tax exclusions in one year. For 2024, an individual can contribute $90,000, or $180,000 for married couples, to a 529 plan without incurring gift taxes.
Maximizing financial aid opportunities
Saving for college is about more than just minimizing taxes. You’ll also want to ensure your savings strategy doesn’t unintentionally reduce your eligibility for financial aid.
For example, 529 plans owned by a parent are treated as a parental asset on the FAFSA (Free Application for Federal Student Aid). 529 plans owned by a grandparent or other relative are treated differently.
While distributions from a 529 plan owned by a grandparent are no longer reported as untaxed student income, they may still be considered on the CSS Profile, an additional financial aid form used by about 200 private colleges in their financial aid decisions.
A financial advisor can help you structure your college savings accounts to optimize eligibility for financial assistance while taking advantage of tax benefits.
Tax-smart investment strategies
College savings plans like 529 accounts allow you to select from various investment options. A financial advisor can recommend investment strategies that align with your goals and timeline.
For example, families saving for a 15-year-old child may want to take a more conservative investment approach than those saving for a newborn. A financial advisor can help you assess your risk tolerance, rebalance your portfolio over time, and ensure you maximize returns while helping to safeguard your savings from market volatility.
Navigate recent changes in 529 plan rules
Recent changes to tax laws have made 529 plans even more attractive. Starting in 2024, families can roll over unused 529 plan funds into a Roth IRA for the beneficiary, up to a lifetime maximum of $35,000.
This provision allows families to avoid penalties for unused funds while providing a powerful tool for jumpstarting a beneficiary’s retirement savings. However, the rollover is subject to several conditions, like the account being at least 15 years old and contributions being rolled over only if they’ve been in the account for five years.
A financial advisor can help you navigate these changes and determine how to incorporate them into your long-term financial plan.
Final thoughts
Navigating the tax benefits of college savings requires more than just opening an account and contributing money.
From choosing the right savings vehicle to coordinating your college savings with financial aid, estate planning, and investment strategies, a financial advisor brings expertise and insights that can make a significant difference—particularly a financial advisor who is also a licensed CPA.
If you’re ready to take the next step in planning for your child’s education, consider contacting a financial advisor who can guide you through this complex but rewarding process.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.