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Invest smarter for college

Oct 17, 2025 | Beth Norman


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The fall college semester is in full swing! Beth Norman answers some commonly asked questions about investing smarter for college.

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Q: We opened a 529 for our children years ago and contribute monthly but are starting to get worried. What if they don’t go to college?
A: Great question! Even if the designated beneficiary of a 529 college savings plan decides not to attend a traditional four-year college, the money saved in a 529 plan is surprisingly flexible. Options include:
Using funds for other educational expenses
529 funds can be used for various educational costs beyond traditional four-year college, including expenses for vocational and trade schools, registered apprenticeship programs and up to $10,000 annually for K-12 tuition at private schools (state laws may vary).
Beneficiary portability
If funds remain unused, you can change the beneficiary to another eligible family member without penalty.
Same tax deferral, different vehicle
The latest flexibility provided by 529s is Roth conversion. Starting in 2024, up to $35,000 of unused funds can be rolled over to a Roth IRA for the beneficiary under specific conditions.
No specific deadline for withdrawing 529 dollars
Money can be left in the account to potentially fund future education or continue tax-deferred growth.

 

Q: I want to keep things simple and just open a savings account for my child at the bank. Is that okay?
A: You can definitely start to teach your child about money by opening a bank account. The account will be considered a custodial account until they are an adult. Custodial accounts have some advantages and disadvantages. Let’s take a look:
Advantages
• Flexibility in spending: Funds can be used for any purpose that benefits your child, not just educational expenses.
• Ease of use: Custodial accounts are easy to open and manage and most local banks have a small minimum.
• No income or contribution limits: Anyone can contribute to a custodial account, regardless of income.
• Potential tax advantages: The first $1,350 of earnings in a UGMA or UTMA account are exempt from federal income taxes (2025). The next $1,350 may be taxed at the child’s lower tax rate.
Disadvantages
• Impact on financial aid: Custodial accounts are considered the child’s assets, which can significantly reduce their eligibility for need-based financial aid (FAFSA).
• Loss of control: Once the child reaches the age of majority, they gain full control over the funds and can use them for any purpose.
• Inability to change beneficiaries: Once a custodial account is established, the beneficiary cannot be changed. Those funds are specifically for that person.
• Kiddie tax: Unearned income (investment income) above a certain threshold ($2,700 in 2025) in a custodial account is taxed at the parent’s rate.

 

Q: My neighbor told me they used some of their Roth IRA to pay for college expenses for their child. Is that possible?
A: It is possible! Your Roth contributions come out first when you take a distribution, and you can use those contributions to cover higher education expenses without tax or penalty. However, it gets tricky if you dip into your earnings.

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Wealth planning

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