BenefitGuard’s core mission is to provide a solution to the retirement problem in the United States.  Through our unique 401(k) offering, we provide the means to resolve certain key factors contributing to the epidemic shortfall in retirement savings; however, there remain a variety of financial decisions outside of direct retirement savings, which affect not only our own financial well-being, but that of our children as well. With that in mind, one of the more common questions that we see is, “how can I save for my child’s future? “


From the moment they touch our lives, our children have a profound and everlasting effect on us. We instinctually want to protect them from the eventualities they will face in life, and provide them with every opportunity to excel in their chosen endeavors. Unfortunately, despite best efforts, achieving these goals has become increasingly difficult, and many get discouraged in the process. To maximize your chance for success, it becomes necessary to save early and consistently for your children’s future, and to do so in the most advantageous means possible.  Ultimately, this requires investment into accounts which align with your personal and financial goals, as well as your current financial situation. Below, we have provided a summary of the most common child savings plans, in an attempt to assist you in taking your first steps towards financially preparing your children for their future.


529 College Savings Plans

529 plans are tax-advantaged accounts, sponsored by individual states, and are intended to be used solely for college savings. The owner, called a ‘participant,’ designates a beneficiary on the account, for whom the money is intended to be used. This beneficiary does not own the account, and can be changed at any time by the participant.


  • Contribution Limits:Limits for 529 plans vary by state, but are generally set somewhere between $250,000 and $400,000+ per beneficiary.
  • Tax Advantages:There are several tax advantages that are built into 529 College Savings Plans. Depending on the state, contributions to the plan may be used as a state tax deduction. In addition to this, all earnings in a 529 plan are federally tax deferred, regardless of how the assets are spent. If the money is spent on qualified higher education expenses for the beneficiary, the earnings become federally tax free.
  • Investment Options:The investment options for 529 plans are more limited than for other account types. The available investments are selected by the individual state’s management group, and will generally consist of a short list of passively-managed mutual funds.
  • Drawbacks: The primary drawback of 529 plans, is that to fully take advantage of the tax benefits, you must spend the money on approved higher education expenses for the beneficiary. This means that if you are needing the money for any other expense, even if it is for the beneficiary, the earnings that are withdrawn will be taxed and penalized by the IRS.

Custodial Accounts under UGMA/UTMA

These types of accounts are owned by the minor and managed by a custodian (usually a parent) until the minor reaches the age of majority in his/her state (generally 18 or 21). All money that goes into the account is considered an irrevocable gift to the minor, and can only be used for his/her benefit.  Once the minor has reached the age of majority, he/she can take control of the account and use the assets without restriction.


  • Contribution Limits: There are no limits to how much can be deposited to the account during a given year. As of 2016, individual donors may be able to contribute up to $14,000 per year to a minor’s custodial account without being subject to gift tax.
  • Tax Advantages: There are no deductions offered on contributions, and no tax free or tax deferred growth. However, the accounts are generally taxed at a lower rate since income is earned in the minor’s name and reported under his/her Social Security Number.
  • Investment Options: This will vary depending on the firm which supports the account. While there are no specific restrictions imposed federally concerning the investment options available, some firms may impose their own restrictions. In general, custodians are able to purchase stocks, bonds, CDs, precious metals, Exchange Traded Funds (ETFs), mutual funds, etc., within a custodial account.
  • Drawbacks:The major drawback of these accounts, is that there are no tax breaks for the custodian or the minor. To some, an additional drawback of a UGMA/UTMA account, is that the minor owns all assets in the account, and can take control of the account once he/she reaches the state determine age of majority. At that point, he/she could use the assets for any purpose, and the custodian would lose control of how the money is invested and spent.

Coverdell Education Savings Accounts

Coverdell accounts are tax-advantaged accounts that have similarities to both UGMA/UTMAs and 529 plans. They offer tax-deferred growth on all earnings, and tax free growth on earnings spent for qualified education expenses. Unlike 529 plans, qualified education expenses for Coverdell assets can apply to all levels of education expenses and not just higher education.


  • Contributions Limits: The annual contribution limit for any designated beneficiary is $2,000.
  • Tax Advantage: Coverdell accounts do not offer a tax deduction on contributions, but they do offer tax-deferred growth on all assets. If the money is spent on qualified education expenses for the beneficiary, then the earnings are federally tax free.
  • Investment Options: Similar to UGMA/UTMA account, investment options will vary depending on the financial firm managing the account, but can include: stocks, bonds, CDs, precious metals, Exchange Traded Funds (ETFs), and mutual funds.
  • Disadvantages: The primary drawback of Coverdell accountsis the contribution limitations.If the account owner has an adjusted gross income over $110,000 (for single filers) or $220,000 (for joint filers), then contributions cannot be made to the Coverdell plan. Additionally, the maximum that can be given to a beneficiary under Coverdell rules, is $2,000 per year.

The information above is intended to give you a starting out point in deciding which method of child savings will work best for you and your situation, and does not represent a comprehensive list of available programs or account types. Regardless of which plan you choose, making the decision to set aside money for your child’s future, will provide them with a significant advantage in life that can make all the difference in them achieving their respective goals and dreams. Happy saving!


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David joined BenefitGuard after having spent the past 9 years working for the largest worldwide provider of 401(k)s. His passions include: economics, personal finance, investing, woodworking, and family.

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