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In this video, I want to talk about four different options available to you as a parent if you're looking to save for your child's future, whether that's for college or beyond.
Transcript
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Welcome back everybody. I pray you all are having a blessed day. In this video, I want to talk about four different options available to you as a parent if you're looking to save for your child's future, whether that's for college or beyond. And one of these options you've probably never heard of. So, if that sounds interesting to you, let's get into it.
Hi, my name is Prince Chenou. I work at a major fin institution and I come on here just to create videos to make personal finance simple, practical, and accessible for everyday people just like you and me. If that sounds interesting, let's dive in. So, to start off, let's talk about one of the most well-known educational savings accounts, the 529 plan.
This is tax advantage investment account specifically designed to help families save for educational expenses. These plans are sponsored by state, state agencies, or educational institutions, but you're not limited to using the plan in your own state. You can shop around for ones that have better investment options or lower fees. How does this work?
The money you invest to 529 plan grows tax defer. When it's time for you to pay for qualified expenses like college tuition, room and board, books, supplies, or even K through2 expenses, you can withdraw the funds completely taxfree. And unlike other accounts such as a Roth IRA, there's no income restrictions on who can contribute.
So whether you're making $80,000 a year or $800,000 a year, you can contribute. Total contribution limit vary by state, but most states allow you to contri or accumulate over 300 to 500,000 per beneficiary over the life of the account. For example, California's cap is over 500,000 per beneficiary. As you consider how much you can contribute to these accounts, it's important to know that in 2025, the annual gift tax exclusion is $19,000 per year per donor per beneficiary index to inflation.
So, for example, let's say you and your partner have two children you're saving up for. Each of you can contribute 19,000 per child, which means you can contribute a combined 38,000 per child. With two kids, that total up to 76,000 contribution across both kids, all without triggering any gift tax or reporting requirements.
But here's where things get really interesting. Using the 5-year election rule, you can frontload your 529 plan and contribute up to $90,000 per year in one year without triggering any gift tax. For a married couple, that's up to 180,000 per child if both parents elect the five-year rule. Let's say you and your spouse each contribute 90,000 total to your daughter's 529 plan.
That's 180,000 invested upfront which has 10 to 15 years to grow before she enters college assuming an average return of 6%. That investment from growth of 360,000 by age 18 completely taxfree if used for college. In addition to this, many states have state income tax deductions or credits that they offer for using their plan.
For example, in New York, you can deduct up to $5,000 per parent per year for your state taxable income if you contribute to a New York plan. Or Indiana, you can get a 20% state tax credit on contributions up to $1,500 per year. One notable change introduced by the passing of the one big beautiful bill is the enhancements in the 529 plan.
Starting 2026, the annual withdrawal limit for K through2 expenses was increased from $10,000 to $20,000 per year. In addition, the definition of qualified K through2 expenses have been extended to include books, online learning, tutoring fees, or educational therapy for students with disabilities. Another major update is that individuals now can roll over 35,000 from the 500 plan into Roth IRA for this same beneficiary tax and penalty free as long as certain conditions are met such as the account being open for at least 15 years and the rollover staying within the annual contribution limit which is $7,000.
So overall the 529 plan is one of the most powerful tools available for funding education while maximizing tax efficiency. Now let's shift gears and talk about UGGMA and UPMA account. Two custodial accounts that also have powerful tools for transferring wealth to the next generation. UGMA account stands for uniform gift to miners act and UPMA stands for a uniform transfer to minor act.
While the names differ slightly, both serve the same core function allowing you to invest money on behalf of your minor in a standard brokerage account. So how does it work? Let me break that down for you. You, the adult, opens and manage the account as the custodian, but the asset legally belong to the child and when the child reaches the age of majority either 18 or 21 depending on your state, they gain full control of the account.
At that point, they can use the money however they want. Whether that's for college, a business venture, travel, or even a down payment on a house. Here's where these accounts differ from 59 plan. There's no limits to educational expenses. You can use the funds for anything that benefits the child. Summer camp, music lessons, or even the first car.
That flexibility makes these accounts attractive if you're not 100% sure your child will be followed the traditional college path. But with that flexibility comes some trade-offs and the biggest one is taxes. These accounts aren't tax deferred, tax-free like the 579 plan. Instead, they subjected to a kitty tax. So, let me explain that for you.
The first $1,300 of unearned income, like dividends or entrance, is taxfree. The next $1,300 is taxed at the child's rate, which is usually low. Anything above $2,600 is taxed at the parents marginal rate. So, if your child's account is generating significant investment income, let's say $5,000 per year, then the portion of that could be taxed at the higher adult tax rate.
This is something to plan for if you're aggressively investing into these accounts. Also important, contributions to a UGGMA and UGMA account are irrevocable trust. Once you put the money in, it belongs to the child. You can't take it back. You can't change beneficiaries or repurpose the accounts like you could with a 529 plan rollover.
And unlike a 529, there's no special rules to the front loan contribution. you're still bound to the 19,000 annual gift tax exclusion per donor per beneficiary 2025. So let's say you and your partner each want to gift 19,000 to your child's account this year. That's a combined 38,000 into the account all without triggering any gift tax reporting.
But remember, once the money is in that account, it's legally your child. It's just waiting for them to reach the age when they can take full ownership of it. Another thing to point out is these accounts count more heavily against your child in the fast formula for financial aid. While the 529 plan is considered a parental asset and is assessed at the maximum 5.6% for aid calculation, custodial accounts are considered student asset and assess at the much deeper 20%.
Potentially reducing your child's eligibility for financial aid. So overall, an UGGMA and a UGMA account offer unmatched flexibility for how funds are used, but they come with trade-offs in tax treatments, financial aid, impacts, and control. They can be a great fit if you want to build generate a general purpose nest egg for your child without the scope of education being involved.
Now, here's one tool that most people overlook, but it's one of the most powerful long-term wealth building tools out there, the Roth IRA for kids. A Roth IRA is typically seen as a retirement account, but if your child has earned income from, let's say, babysitting, lawn care, acting, or part-time job, or even freelancing, they're eligible to contribute to one.
The contribution limit in 2025 is the lesser of $7,000 or the total earned income for the year. Let's break that down. Let's say if your 15-year-old makes 3,000 working at a local summer camp, they or you on their behalf should be up to 3,000 to a Roth IRA for them. The account is in their name, but since the minor can't open up one on their own, you need to set up as a custodial Roth IRA and manage it until they've reached the age of majority.
So, why consider this for your child? Here's where the Roth IR really shines. Contributions are always accessible. Since the Roth IR is funded with after tax dollars, your child can withdraw the original contribution at any time, tax and penaltyree. Earnings grow taxfree and if used for qualified expenses like college tuition or firsttime home purchase, they can also be withdrawn without any penalty under specific rules.
And most importantly, it doubles as a retirement powerhouse. Imagine your child investment 3,000 at age 15 and it grows at a modest 8% annually by the time they're 65. That 3,000 turns into over 100,000 just one contribution. Now, of course, this isn't the best option if your primary goal is to pay for college next year.
But if you're looking to build long-term financial security for your child, this tool is one that most family miss. Just keep in mind your child needs legitimate documented earned income. That means babysitting under the table might not qualify unless it's reported. There's no gift rules like the 529 plan. You can fund the account for your child as long as it doesn't exceed what they've earned for that year.
And finally, it has no impact on financial aid, which makes it even more appealing as part of a well-rounded strategy. Now, let's talk about one of the newest accounts available to parents, Trump accounts. These accounts were introduced under the one big beautiful bill and are designed to help families build generational wealth for their kids without being locked into educational only uses like a five not plan.
Here's the breakdown. You can contribute up to 5,000 per year for a child under age 8 and it will grow tax deferred. Once your child turns 18, they can start withdrawing up to 50% of the account for things like college, first home, or even starting a business. Those withdrawals are taxed at a long-term capital gains rate.
And if they don't use it by age 30, they can still access the rest with taxes and potential penalties if not for qualified purposes. But here's the kicker. Kids born between 2025 and 2028 get a $1,000 federal C deposit at birth as long as one of the parents have a social security number.
That's an automatic head start on wealth building just for being born. Honestly, if you're planning on having a child between 2025, 2028, the Trump account would be a great option, mainly because you're getting free money from the government. But beyond that point, the benefits are pretty limited. Traditional brokerage accounts, including a UGMA and UGMA custodia accounts, don't have contribution or withdrawal limits.
The 529 plan offers more flexibility in terms of who can open the account and how the funds can be used. So, while it's a nice addition, it might not be the most versatile tool in your toolkit. Now, to recap, there's several great tools out there to help parents save for their child's future.
Whether that's for college or beyond. In this video, we talked about a 529 plan, UGGMA UGMAS custodial accounts, Roth IRA for the kids who earn income, and then the new Trump accounts. Each of these options have both their own pros and cons. And the best choice really depends on your family situation, goals, and timeline.
But here's the key. You don't have to just choose one. These accounts can be used together as part of a coordinated plan to give your child the strongest financial foundation. Thank you so much for watching. If you have any questions, please drop them down below. I'd love to hear from you all. And as always, I pray you all have a blessed day.
Thank you.
This video is for general educational purposes only and is not personalized investment, tax, or legal advice. Every situation is different. Talk with a qualified professional about your circumstances before acting. PLC Wealth Partners is a registered investment adviser. See our disclosures.
