From Kindergarten to College: Building a Tax-Efficient Education Fund

The cost of education continues to outpace general inflation, and with student debt still lingering in the news cycle, families today are taking a closer view of the cost of college. So how do we plan for college? Two important concepts to consider are time and taxes. With time and taxes in mind, you must decide which savings vehicle is the right one for you and your family. Frequently, 529 plans headline the show, but there are other options available.

Time

Time allows money to grow. With an 18‑year timeline from birth to college, the power of compounding has ample room to work. Even modest, regular contributions can grow substantially over nearly two decades.

Taxes

Uncle Sam does provide some tax incentives for saving for college. Different accounts have pros and cons, and it’s worth understanding the option available. Tax‑efficient strategies allow families to keep more of what they earn and grow their funds faster. Unlike taxable brokerage accounts, several education‑focused vehicles offer tax‑deferred growth, tax‑free withdrawals, or other tax advantages that significantly enhance long‑term outcomes.

529 Education Savings Plans

A 529 plan is the most popular education savings vehicle. These plans offer high contribution limits, tax‑free growth, and tax‑free withdrawals for qualified education expenses. Additionally, many states offer tax deductions or credits on contributions. The funds may be used for tuition, room and board, books, and even up to $10,000 per year in K–12 tuition. An often-overlooked benefit is that parents can transfer the assets from one child to another.

Additional College Savings Strategies

1. 529 Prepaid Tuition Plans have dwindled over the years, but some states do still offer a 529 prepaid tuition plan, which allows families to lock in today’s tuition rates at participating public colleges. Prepaid tuition plans are more rigid than savings plans but do offer a hedge against tuition inflation.
2. Coverdell Education Savings Accounts provide tax‑free growth similar to 529s but are more geared to primary and secondary education expenses. Due to low contribution limits, usage of Coverdell accounts has waned.
3. Uniform Transfers to Minors Accounts (UTMAs) and Uniform Gifts to Minors Accounts (UGMAs) are types of taxable brokerage accounts that allow parents to transfer assets to their children. These assets aren’t earmarked for education specifically, and income from UTMAs is taxed to the child and may trigger kiddie tax (which means that it gets taxed at the parents’ higher tax rate). The assets also are legally transferred to the child at the age of majority (typically 18 or 21 depending on the state), so by the time the child is in college, the parent has no control over what the child does with the account.
4. Roth IRAs are not considered a traditional savings vehicle for education but do offer some benefits. First, contributions can be withdrawn tax‑ and penalty‑free at any time. Second, earnings can be used for education without penalty (though taxes may apply).

Integrating Education Funding into a Broader Financial Plan

Education planning doesn’t exist in a vacuum. Families must balance these goals with retirement savings, insurance needs, and debt management. Ideally, education strategies should complement rather than compete with long‑term financial well‑being. A comprehensive plan integrates education funding with cash‑flow planning, investment strategy, tax planning, and risk management to ensure financial success.

Common Mistakes to Avoid

• Waiting to start with a large amount instead of starting small
• Not using tax‑advantaged accounts where appropriate
• Leaving contributions uninvested and sitting in cash
• Overfunding education at the expense of retirement

Where to Start

Every journey starts with the first step, which is to set money aside. Comparing and selecting accounts means nothing until you fund them. Once you select the account that’s right for you, make sure you invest the contributions! Don’t leave it in cash. Lastly, set up recurring contributions that work with your pay schedule and/or cash flow and increase the contributions when you are able. If you’re unsure where to begin or how to prioritize your next step, we’re here to help guide you and provide advice tailored to your goals—then time and the markets can take it from there.