Strategic Education Funding: Saving Smarter for the Next Generation
When it comes to funding education for children or grandchildren, families are thinking beyond just how to pay for it—they’re also considering how to plan strategically on behalf of all family members to preserve flexibility, manage taxes, and align with broader financial goals.
Fortunately, there are several effective savings vehicles available, each with unique benefits. Taking time now to review and optimize education funding sources and savings vehicles can help lay a stronger foundation for future education costs. In this piece, we examine three primary strategies that we consider with our clients to help thoughtfully approach education savings:
1. Qualified Education Savings Plans (529 Plans)
A 529 plan account is a tax-advantaged investment account designed to help pay future qualified education-related expenses. These plan accounts continue to stand out as one of the most versatile tools available and recent legislative changes have only enhanced their appeal. They are administered by individual states, but importantly, investors are not restricted to utilizing their home state’s plan—and the student beneficiary isn’t tied to using schools in that state.
Tax Advantages
- Tax-free growth of investments while in the account.
- Tax-free withdrawals for qualified education expenses.
- State tax deductions or credits in some states (though not in California).
Qualified expenses extend well beyond traditional college tuition. They now include (but may vary by state):
- K–12 tuition (up to $10,000/year),
- Registered apprenticeship programs,
- Up to $10,000 in student loan repayment per beneficiary,
- And even rollovers to Roth IRAs (up to $35,000 lifetime, per beneficiary), provided the 529 has been open for at least 15 years.
Estate Planning Benefits
One of the most strategic uses of a 529 plan is to reduce your taxable estate while retaining control:
- In 2025, the annual gift tax exclusion is $19,000 per beneficiary ($38,000 per couple).
- The “superfunding” provision allows you to contribute five years of gifts upfront—up to $95,000 per person or $190,000 per couple in 2025—without triggering gift taxes.
Control and Flexibility
- The account owner retains control over the account, even after the child reaches adulthood.
- The account beneficiary can bechanged to another qualified family member.
- There is no requirement to use the funds for a specific school or state, as long as the institution is accredited.
Note: Excess contributions beyond what’s deemed necessary for education expenses may incur taxes on earnings. Early withdrawals for non-qualified expenses may trigger taxes and a 10% federal penalty (plus potential state penalties).
2. Custodial Accounts (UTMA/UGMA)
Many families also consider Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts as vehicles for college savings. These are simply custodial investment accounts that allow assets to be invested and used for the minor child’s benefit—including, but not limited to, education expenses.
Advantages:
- Funds in custodial accounts can be used for any purpose that is for the benefit of the named minor on the account.
- Given that they operate like a typical investment account, there is flexibility in investment choices.
Considerations:
- The account must be used for the named minor—they are considered the permanent recipient of the assets, not just a “beneficiary”.
- Control of the account and assets shifts to the child when they reach the age of majority (usually 18 or 21), regardless of whether the adult custodian agrees or believes the child is mature or financial responsible.
- Earnings on investments in the account are subject to taxation, typically at the child’s tax rate, but may be partially taxed at the parent’s rate under “kiddie tax” rules.
These accounts can play a key supporting role in planning for college funding but also require careful planning around control and long-term intent.
3. Irrevocable Trusts
For families seeking maximum control and long-term flexibility, irrevocable trusts offer another strategic solution for funding education expenses. These trusts allow a trustee to manage assets on behalf of a beneficiary, and the trustee has flexibility to direct funds toward education or other significant life events (such as a home purchase, start of a business, wedding, etc.).
Advantages:
- High degree of control by the trustee over how and when funds are used for the child.
- Assets are generally excluded from the grantor’s estate, as they are considered to have been gifted to the child through the trust arrangement.
- Can provide broader support for a child beneficiary’s additional life goals beyond education.
Considerations:
- More complex and costly to establish and maintain.
- Require annual income tax return filings and professional trustee oversight.
- Does not offer the favorable tax treatment of 529 plans.
Despite their complexity, irrevocable trusts can be powerful tools for education savings and other resources in multi-generational planning—particularly when flexibility and control are top priorities.
Summary Table
| Strategy | Key Benefits | Considerations |
| 529 Plan | Tax-free growth & withdrawals; estate planning benefits; control & flexibility | Funds must be used for qualified expenses to avoid penalties |
| Custodial Account | Flexible use for child’s benefit; simple to set up | Control transfers at adulthood; less tax-efficient |
| Irrevocable Trust | Maximum control and flexibility; estate planning tool | High setup/admin costs; complex tax treatment |
Bringing It All Together
With the cost of education continuing to rise, planning ahead strategically is more important than ever. It’s not just about saving—it’s about doing so with a specific plan and intention. Whether a family’s goals for their education savings include other factors, such as managing taxes, reducing an estate, or creating a lasting legacy, the tools shared above can offer meaningful advantages when used thoughtfully.
At Litman Gregory Wealth Management, we work closely with our clients to navigate these choices in a way that aligns with a broader financial picture, which begins by understanding our clients’ goals and potential funding scenarios. We then work to develop a tailored strategy, which we also coordinate with our clients’ tax advisor and/or estate planning attorney as needed.
If you have questions about what approach may be best for your family, we encourage you to reach out to your Advisor to discuss your personal situation.