Raising a child is one of the most rewarding experiences in life, but it is also a significant financial commitment. The U.S. Department of Agriculture recently estimated that raising a child born in 2015 through the age of 17 costs over $233,000—and that figure doesn’t even touch the cost of a college degree. From the moment they are born, expenses begin to accumulate. First, it’s diapers and formula, then extracurricular activities and braces, and eventually, the looming cost of higher education.
For many parents, the sheer volume of these expenses can feel overwhelming. However, successfully funding your child’s education and general needs doesn’t require a lottery win. It requires a strategic approach, early planning, and an understanding of the financial tools available to you. By diversifying where you put your money and understanding the specific benefits of different accounts, you can build a safety net that supports your child from preschool to grad school.
The Power of the 529 Plan
When it comes to educational savings, the 529 plan is often the first tool financial advisors recommend. Named after Section 529 of the Internal Revenue Code, these qualified tuition plans are sponsored by states, state agencies, or educational institutions.
There are generally two types of 529 plans: prepaid tuition plans and education savings plans. Prepaid plans allow you to purchase units or credits at participating colleges and universities for future tuition, effectively locking in today’s rates. Education savings plans, on the other hand, let you open an investment account to save for the beneficiary’s future qualified higher education expenses including tuition, mandatory fees, and room and board.
The primary benefit here is tax-advantaged growth. Your earnings are not subject to federal tax, and generally not subject to state tax when used for qualified education expenses. While these funds were traditionally reserved for college, recent changes in legislation now allow families to use 529 assets for K-12 tuition (up to a certain limit annually) and even student loan repayments.
Coverdell Education Savings Accounts (ESA)
For families looking for more investment flexibility than what a state-run 529 plan might offer, the Coverdell ESA is a strong contender. Like a 529, a Coverdell ESA allows your money to grow tax-deferred, and withdrawals are tax-free if used for qualified education expenses.
The defining difference is flexibility. Coverdell funds can be used for a wider range of K-12 expenses, not just tuition. This includes books, supplies, equipment, and even academic tutoring. However, there are limitations. Contributions are capped at $2,000 per year per beneficiary, and there are income limits for contributors. This makes the Coverdell a great supplementary tool rather than a primary savings vehicle for high-cost university degrees.
Custodial Accounts (UGMA/UTMA)
Not every financial need your child will have is related to a classroom. Perhaps you want to help them buy their first car, fund a gap year, or put a down payment on a starter home. For these non-educational expenses, Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are excellent options.
These custodial accounts allow you to hold and protect assets for a minor until they reach the age of majority in their state (usually 18 or 21). You can invest in stocks, bonds, and mutual funds. Unlike 529s, there is no penalty if the money isn’t used for school.
However, parents should be aware of the “kiddie tax” rules and the fact that these assets are counted heavily against the student when applying for financial aid. Furthermore, once the child reaches the age of majority, the money is legally theirs to do with as they please—whether that’s paying for tuition or buying a sports car.
Traditional Savings and Certificates of Deposit (CDs)
While investing in the stock market via mutual funds offers high growth potential, it also comes with risk. For short-term goals—like paying for a braces treatment next year or a school trip—you want stability. This is where high-yield savings accounts and Certificates of Deposit (CDs) come into play.
These accounts offer a safe harbor for your cash. While the returns are generally lower than the stock market, the principal is insured (usually by the FDIC or NCUA). When looking for the best place to park this cash, look beyond the massive national banks. Community-based institutions often provide personalized service and competitive rates on savings products and personal loans for family needs.
For example, credit unions in Utah and other local regions often offer member-centric savings products with lower fees and higher yields than their commercial counterparts. Utilizing these local resources can be a smart way to manage liquid cash that you might need to access quickly for emergencies or immediate school supplies.
Roth IRAs for Kids
This is an unconventional but highly effective strategy. If your teenager has earned income—perhaps from a summer job or babysitting—you can open a custodial Roth IRA for them.
While typically a retirement account, the Roth IRA has a unique feature: you can withdraw your contributions (not the earnings) at any time, tax-free and penalty-free. This means the account can double as an emergency fund or a backup college fund. If your child doesn’t need the money for school, they have a massive head start on their retirement savings.
Scholarships and Grants
Saving money is crucial, but finding “free” money is just as important. Encourage your child to treat applying for scholarships like a part-time job during their high school years.
Many parents make the mistake of assuming scholarships are only for star athletes or valedictorians. In reality, there are thousands of scholarships available for specific hobbies, community service, unique talents, and demographic backgrounds. Local businesses and community groups often have funds that go unclaimed simply because no one applied.
Building a Secure Future
The secret to funding your child’s education and needs isn’t finding one “magic bullet” account. It is about creating a comprehensive strategy that utilizes different tools for different stages of life.
By combining the tax advantages of a 529 plan for college, the flexibility of a custodial account for life expenses, and the safety of local savings options—like those offered by credit unions in Utah—you can build a robust financial foundation. Start small, be consistent, and let the power of compound interest work in your favor. The best day to start planning for your child’s future was yesterday; the second-best day is today.
