How to Build a College Fund for Your Children or Grandchildren

A college fund for your children or grandchildren is a priceless gift that will open doors to a bright future for them. As a parent or grandparent, you want to give them the best opportunities, and funding their education is a significant step toward ensuring their success in life.

Various educational savings plans are available to help you create a college fund that empowers your young scholar to pursue their dreams without the burden of financial stress.

Types of College Savings Accounts

There are several types of college savings options available to your family. 529 plan accounts, custodial accounts, Coverdell education savings accounts (ESAs), and investment services all offer distinct advantages. The most suitable option for you depends on your individual financial goals, tax considerations, and desired level of investment control and flexibility. It is best to carefully examine each option to decide which is best for your family’s college savings needs.

529 Plan Accounts

529 plan accounts are tax-advantaged, state-sponsored college savings accounts to help families save for higher education expenses. These plans offer potential tax benefits and flexible investment options, making them popular choices for parents or grandparents planning for future education costs. 529 plan accounts can be either prepaid tuition plans or education savings plans.

These plans offer some additional flexibility. Annually, you can use up to $10,000 of the funds per beneficiary to pay for public, private, or religious elementary or secondary school. Starting in 2024, the SECURE 2.0 Act will also let some contributors roll up to $35,000 to Roth individual retirement accounts for beneficiaries.

Custodial Accounts

Custodial accounts, also known as Uniform Gift to Minors Act or Uniform Transfer to Minors Act accounts, allow you to gift assets to minors as custodians. Once the minor reaches a certain age (varying from 18 to 21, subject to state laws), the account transfers directly to the dependent. This type of account has no income limits, but your annual contributions will see a limit based on the gift tax exclusion of $17,000.

Custodial accounts are unique, as there are no penalties when you need to withdraw funds to pay for anything other than higher education expenses. While they provide more investment flexibility than 529 plan accounts, they lack specific educational expense tax advantages.

Coverdell ESAs

Coverdell ESAs are another tax-advantaged option for college savings, offering similar benefits to 529 plan accounts. They allow contributors to invest in a wide range of assets, and withdrawals for qualified education expenses are tax-free. In addition to higher education expenses, you can use these funds for select elementary and secondary school expenditures.

Note that these accounts have contribution limits and income eligibility restrictions. The income cap on this account is $110,000 for individuals, and you can only make contributions until the beneficiary turns 18, with a maximum annual contribution of $2,000. While you need to liquidate this account before the beneficiary’s 30th birthday, you can elect to avoid paying tax penalties by rolling the funds over into an ESA for another family member.

Investment Management Services

Some financial institutions offer investment management services tailored to education savings plans. These services provide families with professional guidance in managing the account’s investments to help achieve long-term growth and meet education funding goals. Key aspects of investment management services for college savings accounts include:

• Personalized investment strategy: Your investment manager creates a customized investment strategy that aligns with your family’s needs, goals, and budget to save for college.
• Diverse portfolios: A mix of stocks, bonds, mutual funds, and other investment options may make up your individual savings portfolio. This minimizes risk and increases the chance of long-term growth.
• Tax efficiency: Investment managers use tax-efficient strategies to help you optimize after-tax returns and reduce the impact of taxes on your investment gains.
• Educational planning: While managing your investments, your financial advisor may offer some educational planning assistance for financial aid, more college savings options, and strategies to maximize your current savings.

Tips for Managing Your College Savings Plan

A college savings plan for your child or grandchild can reduce the financial impact of various expenses when they pursue higher education. Here are some ways to work toward college savings success:

1. Set Clear Goals

Define specific and achievable goals for your child’s or grandchild’s college education. Determine how much you want to save within a set timeframe to cover college expenses. This clarity will help you focus on building a suitable college fund.

2. Keep Track of Your Investment Growth

Check your account growth periodically to see how your savings are progressing. If your goals or contribution capabilities are changing, see how you can best adapt your savings plan. If you see some stagnation for an extended period, consider increasing your monthly contribution while steering clear of taking on more risk to make up for any low returns.

3. Start Saving Early

Saving early allows your investments more time to grow, potentially maximizing the funds you’ll have for higher education expenses. If you need, start small and increase your savings contribution when you can. For example, when children are still young, contributions to a 529 plan account can replace birthday gifts and add value to their higher education savings fund.

4. Contribute Regularly

Your monthly contributions accumulate over time, increasing your education planning fund. Choose to automate savings, so you contribute a set amount regularly. This approach will help you make the most of earnings and compounding interest.

5. Stay Informed

Being aware of updates in educational policies and investment laws lets you make the right decisions to maximize your savings potential. This information is also helpful as you keep track of your investment growth, allowing you to adapt your strategy to support your child’s or grandchild’s future expenses.

Choose Client-Focused College Fund Planning Services

Saving to cover the cost of college provides several benefits, including financial security, reduced debt, educational opportunities, and the ability to support the academic aspirations of the next generation. It is a proactive and wise financial decision that empowers your children or grandchildren to pursue their dreams and build a strong foundation for a successful future.

There are several types of college savings account options, and you may choose more than one. HSC Wealth Advisors is here to help you customize an education planning fund that suits your budget and meets your child’s or grandchild’s future needs. Contact us today to learn more about how we can assist you in managing your wealth.