College Savings Planning in CT: 5 Accounts Parents Should Understand
Saving for Your Child's Future: Where Should You Put the Money?
A couple of weeks ago, I was on a field trip with my three-year-old son at the U.S. Coast Guard Academy here in New London, CT. While there, I struck up a conversation with another mother who brought up everyone's favorite topic: tuition.
She and her family were trying to figure out whether they were paying for their children's education as tax-efficiently as possible. They had heard about 529 plans and were considering opening one but weren't sure if it was the right move.
After explaining that 529 plans generally cannot be used for preschool tuition, we started talking about how they can be used for certain K-12 expenses and, of course, college. That conversation quickly turned into a much bigger discussion about the different ways parents can save and invest for their children's future.
It got me thinking about how many parents are probably asking themselves the same questions.
As parents, we want to give our children every opportunity possible. Maybe that means helping pay for college, giving them a head start on their first home, helping them start a business, or simply building a financial foundation they can use as they get older.
But figuring out where to put that money isn't always straightforward.
There are several ways to save and invest for your child's future, and each comes with its own rules regarding taxes, ownership, accessibility, and how the money can eventually be used.
Some accounts offer tax advantages for education expenses. Others provide more flexibility but may come with different tax considerations. And some eventually transfer complete control of the money directly to your child once they reach a certain age.
With newer options like Trump Accounts entering the conversation, parents have even more decisions to consider.
So, where should you actually be putting money away for your children?
Let's break down five common savings strategies, including how they work, their potential advantages and disadvantages, and what parents should consider before choosing one.
1. Parent-Owned Brokerage Account
A parent-owned brokerage account is one of the most flexible ways to invest money for your child's future.
Rather than opening an account in your child's name, you maintain ownership of the investments and simply designate the money as savings intended for your child.
Why parents might consider it:
You maintain complete control over the money.
There are no restrictions on how the funds can be used.
You can change the intended beneficiary.
You can decide when, or even if, you want to give the money to your child.
There are no contribution limits.
The biggest advantage is flexibility.
For example, if you start investing $200 per month when your child is born, you could eventually use that money to help with college, a first home, starting a business, or another major expense.
You aren't limited to education-related withdrawals.
What should you watch out for?
The biggest tradeoff is that you don't receive the same tax advantages offered by certain other accounts.
Investment growth is generally subject to capital gains and/or ordinary income taxes, depending on the type of investment and transaction.
Additionally, because you own the account, it is generally considered a parent asset for financial aid purposes and is included in your taxable estate.
Best for: Parents who want maximum flexibility and control over how and when their children receive financial support.
2. UTMA/UGMA Accounts
UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts allow parents and other family members to transfer money into an investment account legally designated for a child's benefit.
Unlike a parent-owned brokerage account, the money legally belongs to the child.
The parent or another appointed adult serves as the custodian and manages the account until the child reaches the age of majority, which varies by state.
Why parents might consider it:
Money is formally set aside for the child.
There are no contribution limits.
Investments can be used for the child's benefit without being restricted to education expenses.
Contributions are generally considered completed gifts to the child.
This can be an effective way for grandparents or parents to begin transferring assets to the next generation.
What should you watch out for?
The biggest consideration is that you cannot simply change your mind and take the money back.
Once money is contributed, it belongs to the child. You cannot redirect it to another beneficiary.
Additionally, when the child reaches the applicable age of majority, they gain control of the account.
That means the child could use the money for something entirely different than what you originally envisioned.
There are also potential tax implications. Investment income in these accounts may be subject to the kiddie tax rules.
From a college financial aid perspective, UTMA/UGMA accounts are generally treated as student assets, which can have a greater impact on financial aid eligibility than parent-owned assets.
Best for: Parents and grandparents who want to make an irrevocable financial gift and are comfortable giving the child control once they reach adulthood.
3. 529 College Savings Plans
A 529 plan is one of the most popular ways to save for a child's education.
These accounts allow parents to invest money within a tax-advantaged structure designed to cover qualified education-related expenses.
Unlike a traditional brokerage account, investment growth is tax-deferred, and withdrawals used for qualified expenses are generally tax-free.
Why parents might consider it:
Tax-free investment growth when used for qualified expenses.
Potential state income tax benefits, depending on where you live.
The ability to change the beneficiary to another eligible family member.
Parents generally maintain control of the account.
The account is generally considered a parent asset for FAFSA purposes.
For Connecticut families, it is worth looking into whether contributions to the state's 529 plan qualify for a state income tax deduction.
One of the biggest advantages is that you aren't necessarily locked into using the money for one specific child. If one child receives a scholarship or doesn't need all the money, you may be able to change the beneficiary to another eligible family member.
What should you watch out for?
The biggest consideration is how the money can be used.
529 plans are designed primarily for qualified education-related expenses. If you withdraw money for nonqualified purposes, the investment earnings portion is generally subject to ordinary income taxes and a 10% penalty, subject to applicable exceptions.
There are also contribution and gifting considerations. Contributions are generally treated as gifts, and parents may be able to use the annual gift tax exclusion or make a five-year gift tax election.
Best for: Parents who want to prioritize education savings while taking advantage of tax-free investment growth.
4. Permanent Life Insurance
Permanent life insurance is another strategy some parents consider when planning for their children's financial future.
Unlike term life insurance, permanent policies are designed to provide lifelong coverage while potentially building cash value over time.
A parent can purchase a permanent life insurance policy on a child while the child is young and healthy.
Why parents might consider it:
Locks in permanent life insurance coverage while the child is young.
Provides protection against potential future health or insurability issues.
Can accumulate tax-advantaged cash value.
May provide access to cash value through policy loans or withdrawals.
One potential benefit is insurability. By establishing coverage early, parents may help protect the child's ability to maintain life insurance even if their health changes later.
The cash value component may also provide another source of funds for future needs.
What should you watch out for?
Permanent life insurance policies can be complicated and expensive.
Depending on the policy, there may be:
Cost of insurance charges.
Surrender fees.
Subaccount expenses.
Rider fees.
Additional policy expenses.
Accessing cash value through policy loans or withdrawals also requires careful consideration.
Withdrawals generally follow first-in, first-out taxation rules, while policy loans may receive different tax treatment. However, tax treatment can change if the policy becomes a Modified Endowment Contract (MEC).
A policy loan also isn't free money. Outstanding loans can reduce the policy's death benefit and may create tax consequences if the policy lapses or is surrendered.
Best for: Parents who have a specific need for permanent life insurance coverage and understand the costs and limitations of using a policy as part of a broader financial strategy.
5. Trump Accounts
Trump Accounts are a newer savings option designed to help children begin building long-term investments.
These accounts provide a tax-advantaged investment structure intended to give children a financial head start, with potential eligibility for an initial government contribution subject to program guidelines.
Unlike a 529 plan, which primarily focuses on education, Trump Accounts are designed around longer-term financial growth.
Why parents might consider it:
Provides a tax-advantaged investment structure.
Allows family contributions of up to $5,000 annually per beneficiary.
May allow employer contributions of up to $2,500 annually per employee, subject to the aggregate contribution limit.
May qualify for additional government support.
Can help establish a long-term investment foundation for a child.
One of the interesting features is the potential for employer contributions and government incentives.
For families who qualify, these contributions could provide an additional opportunity to build savings over time.
What should you watch out for?
There are important restrictions to understand.
According to the current comparison, the child gains control of the account at age 18. Parents cannot take the money back or change the beneficiary.
The account is also considered a student asset for FAFSA purposes, which may affect financial aid eligibility.
Tax treatment is another important consideration. Family contributions can generally be withdrawn tax-free to the extent of basis, while other withdrawals may be taxable as ordinary income. Withdrawals may also be subject to penalties.
Because these accounts are relatively new, parents should carefully review the applicable program rules, contribution requirements, and withdrawal restrictions before making decisions.
Best for: Parents looking to establish a long-term investment account for their children and potentially take advantage of additional government or employer contributions.
Comparing the 5 Savings Strategies
There isn't one account that is automatically better than the others. The right choice depends on what you're trying to accomplish and how much control you want to maintain.
Here's a quick comparison:
Account | Parent maintains control? | Can change beneficiary? | Tax-deferred growth? |
Parent-owned brokerage | Yes | Yes | No |
UTMA/UGMA | Until age of majority | No | No |
529 plan | Generally yes | Yes | Yes |
Permanent life insurance | Generally yes | Yes | Yes |
Trump Account | Until age 18 | No | Yes |
There are also differences in how each account is treated for college financial aid purposes.
Generally speaking, parent-owned brokerage accounts and 529 plans are treated as parent assets, while UTMA/UGMA accounts and Trump Accounts are treated as student assets under the comparison. Permanent life insurance cash value is generally not included as a FAFSA asset.
These distinctions can matter when determining how much financial aid your child may qualify for.
So, Which Savings Strategy Should You Choose?
Before opening an account, I would encourage parents to step back and think about the purpose of the money.
Are you trying to:
Pay for your child's college education?
Give them money toward their first home?
Help them start a business?
Build long-term wealth they can access as an adult?
Maintain control over the money until you believe they are financially responsible?
Those are very different goals, and they may call for different savings strategies.
For example, a 529 plan may make sense if education is your primary goal. A parent-owned brokerage account may be more appropriate if flexibility and control are your priorities.
You may also find that using more than one account makes sense.
There is no rule that says you have to choose just one strategy. A family might use a 529 plan for education savings while maintaining a separate brokerage account for other future opportunities.
The important thing is understanding the tax implications, ownership rules, and restrictions before committing money to an account.
Don't Forget About Your Own Retirement
One final point that I think is important for parents to consider: Don't sacrifice your own retirement savings to fund your children's future.
There are many ways your children can pay for college, including scholarships, financial aid, student employment, and potentially student loans.
But there are far fewer options for funding your own retirement.
You can borrow for education, but you generally cannot borrow your way through retirement.
Before aggressively funding accounts for your children, make sure you're on track with your own retirement goals.
Building a strong financial foundation for your family starts with making sure your own financial future is secure.
Final Thoughts
Saving for your children is one of the most meaningful financial goals you can work toward. But the account you choose can make a significant difference in how that money grows, how it is taxed, and who ultimately controls it.
Rather than automatically opening a 529 plan or following what another family is doing, take the time to understand your options.
The best strategy is the one that aligns with your family's goals, tax situation, and overall financial plan.
Need help figuring out which savings strategy makes sense for your family?
At In The Money Retirement Planning, we help families make informed financial decisions by looking at the bigger picture. That includes coordinating education savings, tax planning, investment strategies, and retirement goals.
Schedule a complimentary introductory meeting to discuss your financial planning needs.
About the Author
Marc Lowe, CFP® is a fee-only fiduciary advisor based in Waterford, CT, helping small business owners & families make smarter financial decisions.
The information presented in this article is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through In The Money Retirement, an investment adviser registered with the state of Connecticut. The information linked to on third-party sites is being provided strictly as a courtesy and convenience. We make no representation as to the completeness or accuracy of information provided at these websites. When you access these websites, you are leaving our website and assume any and all responsibility and risk for use of the web sites you are visiting. The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
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