The first step is learning about account types. For example, do you want to help your child with college tuition expenses, or saving for your retirement or both? These five common account types will help you accomplish those savings goals for your children:

Coverdell Education Savings Account (CESA) – This account is not taxed on withdrawal if you use the money for eligible education expenses. You can save up to $2,000 per child per year toward education expenses, as long as you are within the income limits. Money contributed to a CESA is not deductible from your current federal tax income.

529 plan – These plans also are not taxed upon withdrawal as long as you use the money for eligible education expenses. Money contributed to a 529 plan is not deductible from your current federal taxable income, but may qualify for a state tax deduction or credit.

529 plans either pre-pay education costs or contribute to a tax-deferred savings account:

• When you open a prepaid tuition plan account, the money you contribute is converted to units or credits to be used for college and university education. Most 529 prepaid tuition plans are sponsored by state governments and require you to be a state resident to be eligible. These plans are not available in every state.

• When you open a savings plan, the contributions grow tax deferred and may be withdrawn tax-free if that money is used to cover eligible education costs for the beneficiary. In addition, you may take up to $10,000 per year in tax-free withdrawals to pay for tuition expenses at private, public and religious K-12 schools. The SECURE Act passed in 2022 also allows you to roll unused 529 plan funds into the beneficiary’s Roth IRA without a tax penalty. There are several rules for this type of rollover including:
  • The 529 account must be open for more than 15 years and the rollover amount must have been in the account for at least five years.
  • The rollover amount cannot exceed the cumulative annual IRA contribution limits ($7,000, or $8,000 for those over age 50 in 2024).
  •  There’s a $35,000 lifetime cap per beneficiary. Due to the Roth contribution limits, it will take four to five years to achieve this cap, depending on the recipient’s age.
  • The beneficiary’s income in the year of the rollover must be at least equal to the value of the rollover.

Roth IRA – This retirement fund allows you to withdraw the basis (the money you contributed) first to cover your child’s qualified educational expenses. The basis would not be taxable upon withdrawal because those dollars were already taxed before they entered the Roth IRA account.

You would face a 10% penalty for withdrawing investment earnings beyond your total contributions before age 59½ if the money is used for your retirement needs. However, you wouldn’t face that same penalty if the money were used for your child’s qualified educational expenses. Note, the basis is withdrawn first, so it is not taxed. If you’re 59½ and it has been five years or longer since you first contributed to the account, you also wouldn’t be taxed on earnings. However, if you don’t meet that criteria, you would have to pay income tax on the investment gains and a potential penalty if you are less than 59½, unless you qualify for an exception.

This may be the most flexible option for parents who are unsure how much they’ll be able to contribute to their child’s education without harming their own retirement. After establishing a Roth IRA, you can wait until your child is ready to start college to determine whether to use it toward his or her educational expenses. If your retirement is well funded, you may opt to spend your Roth savings on educational expenses instead of retirement.

You can open a Roth IRA and start contributing at any time as long as you or your spouse have earned income and meet the income requirements.

General investment account – A general investment account is a convenient and flexible way to invest. While not specific to saving for a child’s education, this type of brokerage account is an option for investing for both long- and short-term needs. If you want to invest to cover a child’s costs in addition to education, such as sports or school activities, this type of account provides a more flexible option.

For short-term investing options, consider a money market account and for long-term, a more aggressive fund like a stock fund or asset allocation fund may work best. (See: Thrivent Equity Funds)

UTMA custodial account – A uniform transfers to minors act (UTMA) custodial account lets you establish and manage assets for your child, including stocks and other securities. Once the account is established on behalf of your child, the assets are considered irrevocable gifts that belong to them. The money must be used for the benefit of your child—and isn’t limited to just education costs.

Contributions are unlimited (the contributions are considered gifts and fall under the annual gift exclusion rule), and you can invest them in any of Thrivent’s mutual funds. Any investment income belongs to your child and it may be subject to the “Kiddie Tax”. Just know that once your child reaches the age of majority (generally age 18 to 21, depending on the state), the account must be turned over to them and they’ll have access to the funds for any purpose. (See: UTMA plans)

Start investing for your children today

No matter what account type you may choose, the earlier you begin investing, the more time your investments have to grow alongside your family for the future. Visit our Accounts page to learn more about opening an account with Thrivent Mutual Funds.