How To Fund Higher Education


About the Author

clay zachry

true Clay Zachry, CFP®

Vice President/Partner

For families in America, funding a college education is the second largest expense next to owning a home—or, in some cases, an even larger expense. With the average tuition costing $36,000 a year, it’s no longer as easy as it once was to save money. If your goal is to put a child through college, the best approach is to start early—and understand which financial planning resources are available to you—which we’ll detail here.


 When & How to Start

The second you have a social security number for your child—typically a week or two after they’re born—you’ll be able to sign up for a 529 plan in your child’s name.

What is a 529?

Much like a Roth IRA, a 529 is a type of tax-advantaged investment account where the money you put in can grow tax-free—and then you can take the money out with no taxes to pay.

The caveat for a tax-free 529 is that you must spend the money on a qualified higher education expense, such as: tuition, fees, books, studying abroad, housing, and meals.

There are also limits to how much you can invest. In 2023, you can gift $17,000 a year—or frontload the account with up to $85,000 (five years’ worth of investments) all at once.

The lifetime cap on aggregate 529 plans ranges from $235,000 to $550,000 by state.

In some states, you may also be able to get a tax break for contributing to a 529.

In addition to using the money for college, you can also withdraw up to $10,000 a year for K-12 private education.

The investment options in a 529 are designed to be relatively low-risk or “set it and forget it.”

One disadvantage of a 529 is that you could wind up paying taxes—along with a 10% penalty—on your earnings if you take the money out for reasons other than funding a college education.

On the bright side, the Secure Act 2.0 added some flexibility last December, where you can now rollover some money into a Roth IRA, if necessary.


Alternatives to 529 College Savings Plans

While the 529 is the most widely recommended option, it’s not the only option. Alternative ways to save for college tuition include:

  • A Traditional Brokerage Account – When you open up an account at Schwab, Fidelity, or wherever you do your investing, you can make contributions and invest. This gives you more flexibility to use the money however you want, though you’ll have to pay taxes on capital gains, dividends, and the money you take out.
  • Custodial Account (UTMA, UGMA) — You can also open up an investment account where you are the custodian, and your child becomes the beneficiary at the age of majority (18 or 21, depending on the state). The caveat is that you do lose some control—say, if your child turns 18 and decides, “I’d rather not go to college. I’d rather see the world with my $300,000.”
  • Coverdell Education Savings Account — Popular in the 80s and 90s, Coverdell lets families earning less than $190,000 in annual household income contribute up to $2,000 a year, tax-free.


Deciding Who Should Pay for College

Personal philosophies come into play when you’re deciding how much to set aside.

  • Parents: Some parents believe it’s their sole responsibility to ensure their kids get through college. It can be a point of pride to say, “I put my kids through college,” or a satisfying way to spend your wealth.

  • Parent/Child Combo: Other parents want their kids to have some skin in the game, earn money for certain expenses, or pay a percentage of it and learn how to responsibly manage debt. It can also be a matter of necessity to ask the child to assume some of that debt. If you have a family of four or five, those numbers can add up really quickly.

  • Child: While parents may love their kids, they also have to be able to save for retirement. The reality is that kids can always take out loans for college—it’s not ideal, but they can. You have to be able to take care of yourself. You can’t take out a loan for retirement, and you can’t count on your kid to pay for your life—even if you’ve sacrificed to pay for their college education. For most families, it’s a balancing act. I always advise: contribute to your 401(k) retirement plans first and then consider what you want to do with what’s left over.

And no matter what you choose, it’s essential to have these conversations with your child when they’re old enough—and set up realistic expectations—so you don’t wind up with a situation where your child thinks you’re paying, but then they’re sacked with surprise debt.


What To Do When College Isn’t Right for Your Child

Parents can also start an early aggressive savings plan only to find, as the kids get older, that maybe college isn’t right for them. Perhaps they have different goals, viewpoints, aptitudes, or learning disabilities. Maybe they want to join the Navy. 

So what can parents do if they’ve created a large pot of unused money?

1). Thanks to the Secure Act 2.0, If you decided to start a 529 at least 15 years ago, you can roll over up to $6,500 a year (to a maximum of $35,000) to a Roth IRA in the beneficiary’s name tax-free.

2). Or you might switch the 529 to another child to avoid the taxes and penalties.


How a Financial Advisor Can Help

When you’re working with a financial planner at EP Wealth, we can conduct annual reviews on your college savings funds and run projections to be sure you’re contributing enough to hit your goals.

In some years, you may be able to set aside the maximum, while in others, you may not. We’ll help you determine how much cash you’ll need to cover college education, day-to-day expenses, retirement, and whatever long-term goals you have on the horizon. Contact EP Wealth Advisors today to get the conversation started.









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