4 Tax Advantaged College Funding Strategies

Smiling mom and daughter at graduation, a moment made possible by smart college savings strategies.

Investments | April 2, 2025

Looking for smart college savings strategies? Whether you’re planning for a child, grandchild, or yourself, the cost of higher education continues to climb—and it’s never too early to start saving. With the right financial planning tools, you can reduce future student debt and gain powerful tax advantages along the way.

Here are four tax-advantaged education savings strategies every family should consider.

1. 529 Plans: One of the Best College Savings Strategies

A 529 Plan is a state-sponsored education savings account that offers tax advantages and broad flexibility for families saving for college.

Key Benefits:

  • Contributions grow tax-deferred, and withdrawals for qualified education expenses are tax-free.
  • Funds can be used for a wide range of education-related costs, including K–12 tuition, college, vocational programs, and some student loan repayment.
  • Qualified expenses typically include tuition, room and board, books, computers, internet access, and required supplies. See our full list of qualified 529 Plan expenses to make the most of your tax-free distributions.
  • Many states offer state income tax deductions or credits for contributions.
  • You can transfer unused funds to another eligible family member.

Gifting Advantages:

You can make substantial contributions to a 529 Plan without triggering gift taxes by leveraging the annual gift tax exclusion. There’s also a special provision that allows contributors to front-load multiple years of gifts in a single year—a great way to accelerate college savings.

Tip: Withdrawals should occur in the same calendar year as the expense to avoid potential penalties.

Also, check your state’s specific rules, as 529 plan benefits and contribution limits vary.

2. UTMAs: A Flexible Way to Save for College and Reduce Estate Taxes

A UTMA (Uniform Transfers to Minors Act) account is a simple yet effective way to transfer assets to a child. It’s not limited to education but can play a role in broader college funding strategies, especially for those also considering estate planning.

Advantages:

  • Assets can be used for any expense that benefits the child, not just education.
  • No contribution limits or income restrictions.
  • Reduces the size of your taxable estate while supporting the child’s financial future.

Considerations:

  • Assets are considered the student’s, which can reduce financial aid eligibility more significantly than a parent-owned 529 plan.
  • Once the child reaches the age of majority, they have full control over the account and can use the funds as they choose.

UTMAs offer flexibility but may not provide the same tax advantages or financial aid benefits as dedicated education savings plans.

3. Custodial Roth IRAs: Long-Term Value for Working Teens

If your child or grandchild has earned income, a Custodial Roth IRA can serve as both a college savings vehicle and a head start on retirement planning.

Why It Works:

  • Contributions grow tax-free and can be withdrawn tax-free for qualified purposes, including education.
  • Contributions (not earnings) can be withdrawn at any time without penalty.
  • Any unused funds can remain invested for decades, building long-term wealth for retirement.

While Roth IRAs aren’t solely for college savings, their flexibility makes them a strong addition to your education funding strategy, especially for teens with part-time jobs.

4. Cash Gifts and Tuition Payments to Fund College

Making cash gifts or paying tuition directly to an educational institution is another way to support a student’s education—while potentially reducing your taxable estate. These options can complement other college savings strategies and may provide additional tax advantages.

Key Benefits:

  • You can give cash directly to the student or contribute to an existing education savings account, such as a 529 Plan
  • Tuition payments made directly to a qualified institution are not considered taxable gifts and do not count toward your annual gift tax exclusion.
  • Gifting appreciated assets, like stocks, can help avoid capital gains taxes while helping fund education expenses.

Planning Tip: Educational gifts can play a strategic role in estate planning. The IRS allows for a lifetime gift and estate tax exemption, which can help you transfer assets efficiently while supporting a student’s financial future.

Making the Most of Your College Savings Strategy

Choosing the right college savings strategy depends on your financial goals, family situation, and timeline. Whether you’re using a 529 plan, custodial account, or Roth IRA, the best results come from starting early and reviewing your options regularly.

Ready to explore the best college savings plans for your family? Contact Forward Investment Services to build a personalized strategy that makes higher education more affordable and your financial goals more achievable.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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