College Is Expensive. Here’s How Smart Parents Plan for It.
In this episode of Money Rehab with Nicole Lapin, parents and future parents can learn about various education savings options, with a focus on 529 plans—investment accounts that offer tax advantages for education expenses. The summary covers contribution limits, tax implications, and potential state incentives, while explaining how parents can start saving even before their child is born.
The episode also explores alternatives to 529 plans, including Coverdell Education Savings Accounts and custodial accounts, as well as the upcoming Trump Savings Account initiative for children born between 2025 and 2028. Parents will understand how different savings vehicles can work together, including strategies for using leftover funds and options for rolling money into Roth IRAs after college completion.
This is a preview of the Shortform summary of the Feb 23, 2026 episode of the Money Rehab with Nicole Lapin
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1-Page Summary
529 Plans For Education Savings
529 plans are investment accounts that offer significant tax advantages for education savings. These accounts allow money to grow tax-free, and withdrawals for qualified education expenses are exempt from federal tax. Prospective parents can start saving before their child's birth by opening an account in their own name and later transferring it to the child.
While there's no federal limit on contributions, amounts over $19,000 in 2026 could trigger gift tax implications. However, the IRS allows "superfunding" - contributing up to five years' worth of gifts ($95,000) at once. Many states offer additional incentives, such as contribution matches or tax deductions, though investors aren't limited to their home state's plan.
Education Savings Accounts vs. 529 Plans
Coverdell Education Savings Accounts (ESAs) offer an alternative to 529 plans, with tax-free growth for both college and K-12 expenses. However, these accounts have stricter limitations, including a $2,000 annual contribution cap and income restrictions.
Custodial accounts (UGMA and UTMA) provide more flexibility, allowing funds to be used for any expense benefiting the child, not just education. However, these accounts can significantly impact financial aid eligibility, and the child gains complete control of the funds at adulthood.
Trump Savings Account and Education Savings Strategy
The Trump Savings Account initiative will provide $1,000 to eligible U.S. citizen children born between 2025 and 2028. These accounts can accept up to $5,000 in annual contributions, plus $2,500 in employer contributions. While beneficial, these accounts lack the tax advantages of 529 plans and should be viewed as complementary rather than replacement savings vehicles.
Education Savings Strategies From Birth Through College
Starting early with a 529 plan can yield significant returns through compound growth - contributing $250 monthly from birth could result in approximately $138,000 by age 18. Some states offer prepaid tuition plans that lock in current public university rates for future use.
For comprehensive education savings, families can combine different account types: Coverdell ESAs for K-12 expenses, custodial accounts for flexibility, and 529 plans for long-term education savings. If 529 funds remain after college completion, up to $35,000 can be rolled over into the beneficiary's Roth IRA, provided the account has been open for at least 15 years.
1-Page Summary
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Counterarguments
- While 529 plans offer tax advantages, they may not be the best option for everyone, as they can be less flexible than other savings vehicles and may have higher fees or lower returns compared to other investment options.
- The ability to transfer a 529 plan to the child may not always be beneficial if the child decides not to pursue higher education, potentially leading to tax penalties if the funds are not used for qualified expenses.
- The gift tax implications for contributions over $19,000 in 2026 might discourage some people from maximizing their contributions to a 529 plan.
- "Superfunding" a 529 plan with $95,000 may not be feasible for many families, limiting the usefulness of this feature for those with lower incomes.
- State incentives for 529 plans can vary widely, and not all states offer meaningful benefits, which could influence the decision of where to invest.
- Coverdell ESAs, while offering tax-free growth for K-12 expenses, are limited by their low contribution cap and income restrictions, making them less attractive for some families.
- Custodial accounts may provide more flexibility, but the potential negative impact on financial aid eligibility and the loss of parental control when the child reaches adulthood could be significant drawbacks.
- The Trump Savings Account initiative, while providing an initial $1,000 and allowing additional contributions, lacks the tax advantages of 529 plans, which may limit its overall benefit as a primary savings vehicle.
- The assumption that a 529 plan started at birth with monthly contributions will yield a specific amount by age 18 does not account for market volatility and the potential for investment losses.
- Prepaid tuition plans can be risky if the child decides to attend a private or out-of-state college, as the benefits may not fully cover the costs of tuition at those institutions.
- The strategy of combining different education savings accounts may be complex and require careful management to ensure that funds are used optimally and in accordance with the various rules and restrictions.
- The option to roll over up to $35,000 from a 529 plan into a Roth IRA is subject to certain conditions, and not all beneficiaries may meet the requirements or find this option advantageous depending on their individual circumstances.
Actionables
- You can maximize your child's education savings by setting calendar reminders to review and adjust your 529 plan contributions annually, ensuring you're taking advantage of any increased gift tax exclusions or changes in your financial situation. This helps you stay on top of contribution limits and tax benefits without having to constantly monitor tax laws.
- Consider creating a family gifting strategy where relatives contribute to your child's 529 plan instead of giving traditional gifts for birthdays and holidays. This can be facilitated through many 529 plan providers that offer gifting platforms or contribution coupons that can be shared with family members, turning occasions into opportunities for boosting education savings.
- Use online calculators to compare the projected benefits of different education savings accounts, including 529 plans, ESAs, and custodial accounts, based on your specific financial situation and goals. This personalized analysis will help you create a diversified education savings portfolio that balances growth potential with tax advantages and financial aid considerations.
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529 Plans For Education Savings
A 529 plan is an investment account offering significant tax advantages for individuals saving for education-related expenses.
529 Plans: Tax-advantaged Accounts For Education Expenses
These tax-advantaged accounts are designed to encourage saving for future education costs.
Tax-free Growth; Education Withdrawals Free From Federal Tax
A major benefit of 529 plans is that money within these accounts grows tax-free. In addition, withdrawals for qualifying education expenses, such as tuition, books, housing, and laptops, are exempt from federal tax. However, if you use the earnings from a 529 plan for non-education expenses, the gains will be subject to federal income tax as well as a 10% federal penalty.
Open 529 Plans Before Birth for Immediate Growth
Prospective parents don't have to wait for a child's birth to start saving. You can open a 529 plan in your name before the child is born and later transfer the beneficiary status to the child. This strategy allows for immediate growth of the funds.
529 Plan Contributions: Annual Limit Before Federal Gift Tax
While there is no limit to the amount you can contribute to a 529 plan at the federal level, contributions over $19,000 in 2026 could invoke the federal gift tax. The IRS does allow for a process known as "superfunding," where you can frontload five years' worth of gifts, up to $95,000 per beneficiary, into a 529 plan without triggering the gift tax, as long as no further contributions are made in the subsequent five-year period.
States Offer Incentives to Encourage 529 Plan Usage
Some states provide additional incentives to use 529 plans. ...
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529 Plans For Education Savings
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Counterarguments
- While 529 plans offer tax-free growth, investment options within the plans may have limited diversity and could underperform compared to other investment accounts.
- The tax benefits of 529 plans primarily benefit those in higher tax brackets, potentially offering less advantage to lower-income families.
- Some critics argue that the existence of 529 plans may contribute to the rising cost of education by providing a steady stream of funds to colleges and universities.
- The penalties for non-qualified withdrawals from 529 plans can be harsh, making the funds less flexible than other savings vehicles.
- State incentives for 529 plans may not be sufficient to offset the costs of higher education, and the benefits may vary widely from state to state.
- The gift tax exemption limits and superfunding options favor those with significant financial resources to contribute large sums upfront.
- There is a risk that the child will not need the funds for education due to scholarships, choosing not to attend college, or other career paths, which could result in tax penalties if the money is used for other purposes.
- The p ...
Actionables
- You can simulate future education costs and savings growth using an online 529 plan calculator to visualize the potential benefits of starting early. By inputting your current savings, estimated monthly contributions, and the age of your child, you can project the value of your 529 plan over time and adjust your contributions accordingly to meet your educational funding goals.
- Create a 529 plan contribution strategy by setting up automatic monthly transfers from your checking account to ensure consistent savings. This approach helps you stay disciplined with your savings goals and can potentially reduce the temptation to spend that money elsewhere. Additionally, by aligning these transfers with your payday, you can treat contributions like any other regular expense.
- Explor ...
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Education Savings Accounts vs. 529 Plans
Choosing the right savings vehicle for a child’s education can be complex, with various options offering different benefits and limitations. Coverdell Education Savings Accounts (ESAs) and custodial accounts present unique features compared to 529 plans.
Coverdell ESAs Offer Tax-advantaged Growth For More K-12 Expenses, Not Just College
Coverdell ESA Contribution Limits and Income Restrictions
Coverdell ESAs are special savings accounts that offer tax-free growth for educational expenses. However, contributions to a Coverdell ESA are capped at $2,000 per child each year, and contributors must adhere to income limitations, which can restrict who is able to contribute.
Coverdell accounts are not just for college expenses; they can also be used for K-12 costs. These expenses can include private school tuition, purchasing a computer for school purposes, or funding academic tutoring—all benefiting from the account’s tax-free growth, as long as the funds are used for qualified education expenses.
Custodial Accounts: Assets Transfer To Child At Adulthood
Custodial Accounts Affect Financial Aid Eligibility More Than 529 or Coverdell Accounts
Custodial accounts, also known as UGMA and UTMA accounts, are another type of savings vehicle where assets are in the child’s name and transfer to them when they reach adulthood. These accounts can impact a child's financial aid eligibility more significantly than 529 plans or Coverdell ESAs because the assets in a custodial account are considered the student’s when applying for financial aid.
Custodial Accounts Permit Non-education Expenses Like Cars or Homes
One of the key features of custodial accounts is the flexibility in ho ...
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Education Savings Accounts vs. 529 Plans
Additional Materials
Counterarguments
- Coverdell ESAs, while offering tax-free growth, have relatively low contribution limits compared to 529 plans, which may not be sufficient to cover the rising costs of education.
- The income restrictions on Coverdell ESAs may prevent higher-income families from taking advantage of this savings option, potentially limiting its usefulness to a narrower demographic.
- While Coverdell ESAs can be used for K-12 expenses, this may not be a significant advantage for families who do not have private school tuition costs or other qualifying K-12 expenses.
- Custodial accounts may offer more flexibility in terms of fund usage, but this can also be a drawback if the child does not use the funds responsibly once they gain control.
- The impact of custodial accounts on financial aid eligibility might discourage ...
Actionables
- You can diversify your child's education fund by opening both a Coverdell ESA and a custodial account, using the ESA for educational expenses and the custodial account for broader needs like a first car or business startup. This way, you ensure that funds are available for immediate educational needs while also investing in your child's future financial independence.
- Consider setting up a calendar reminder to review your income annually to determine if you are eligible to contribute to a Coverdell ESA, and if so, make the maximum contribution to take full advantage of its tax benefits. By doing this, you stay on top of contribution opportunities and ensure you're maximizing the potential growth of your educational savings.
- Engage in a family discussion with ...
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Trump Savings Account and Education Savings Strategy
The Trump Savings Account initiative presents a new opportunity for families with children born in the near future.
Trump Accounts Grant $1,000 For Eligible Children Born 2025-2028
Children who are U.S. citizens born between January 1st, 2025, and December 31st, 2028, are eligible for Trump savings accounts. These accounts are an initiative to support the financial future of the next generation of Americans.
Trump Savings Accounts: $5,000 Limit per Year; Employer Contribution Limit $2,500
Each eligible child will receive a free $1,000 starter contribution from the federal government to help kickstart their savings. With the ability to accept annual contributions up to $5,000 and an additional employer contribution limit of $2,500 per year, families and supporters of the child's financial growth have an avenue to secure and build upon that initial grant.
Trump Accounts Lack the Tax Advantage ...
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Trump Savings Account and Education Savings Strategy
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Counterarguments
- The $1,000 starter contribution may not keep pace with inflation, reducing its future value.
- A $5,000 annual contribution limit might be insufficient for covering the rising costs of education.
- Employer contributions are voluntary, so not all children may benefit from the additional $2,500 potential contribution.
- The lack of tax advantages could make Trump Savings Accounts less attractive compared to other savings options.
- The initiative may not address the needs of lower-income families who might struggle to contribute to such savings accounts.
- The program's effectiveness could be limited if it does not include educational resources or incentives fo ...
Actionables
- You can set up a dedicated savings account for your child's future expenses that aren't covered by the Trump Savings Account, such as extracurricular activities or health-related costs. By doing this, you ensure that while the Trump Savings Account grows for education, you're also preparing for other significant aspects of your child's development.
- Consider organizing a small community group with other parents who have children eligible for the Trump Savings Account to share tips and strategies on maximizing contributions. This could include setting up informal contribution circles, where members commit to supporting each other's children's accounts periodically, fostering a supportive network.
- Create a vi ...
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Education Savings Strategies From Birth Through College
Starting a 529 Early Maximizes Savings Through Compound Growth
Contributing $250 monthly to a 529 plan from a child's birth could yield around $138,000 by the time the child turns 18, assuming a historical average rate of return for the stock market. This growth is attributed to the power of compound interest.
Coverdell Esas and Custodial Accounts Enhance 529 Plans For K-12 Expenses
Coverdell Esas Offer Tax-advantaged Growth For K-12 Expenses Like Tuition, Supplies, and Technology
Educational expenses for K-12, such as tuition, supplies, and technology, can be paid with tax-advantaged growth through Coverdell Education Savings Accounts (ESAs).
Custodial Accounts' Fund Usage Is Less Restricted but May Impact Financial Aid Eligibility
Custodial accounts provide flexibility for fund usage in comparison to 529 plans and Coverdell ESAs, but they may affect the child's eligibility for financial aid.
Prepaid Tuition Plans Lock In Current Public University Rates for Future Use
In states like Florida, Texas, and Virginia, prepaid tuition plans allow you to lock in the current tuition rates at public universities. As tuition typically rises faster than inflation, prepaid tuition plans can result in significant savings over time.
Late 529 Plan Contributions Still Valuable for Coll ...
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Education Savings Strategies From Birth Through College
Additional Materials
Counterarguments
- While a 529 plan can yield significant savings, the actual return on investment can vary due to market volatility, and there is no guarantee of achieving the historical average rate of return.
- Coverdell ESAs have contribution limits and income restrictions that may not make them suitable for all families.
- Custodial accounts may offer flexibility, but the impact on financial aid eligibility can be significant, potentially outweighing the benefits of less restricted fund usage.
- Prepaid tuition plans are beneficial but are limited to certain states and may not cover the total cost of college if the student chooses to attend a private or out-of-state institution.
- Late contributions to a 529 plan may not benefit as m ...
Actionables
- You can automate your 529 plan contributions by setting up a direct deposit from your paycheck to ensure consistent savings without having to remember to transfer funds each month. By doing this, you're leveraging the "set it and forget it" principle, which can help you stick to your savings goal with minimal effort. For example, you could arrange with your employer's payroll department to have a portion of your paycheck directed to your child's 529 plan account.
- Consider using a financial aid calculator to understand how different savings accounts might affect your child's aid eligibility. Tools like these can simulate various scenarios and help you make informed decisions about which types of accounts to prioritize for education savings. For instance, you might input your financial information into an online calculator to see how a custodial account balance could impact potential aid versus a 529 plan.
- Explore setting up a Roth IRA in your child's name onc ...
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