Best Ways to Save For Your Child’s Future

By Zach Bainter, CFP®

Now that your kids are back in school, it is time to make sure that you are doing what you can to best prepare yourself for their future educational expenses.

Raising a family in Los Angeles is not cheap. Whether you are sending your little ones to private school now or you just want to make sure there is a plan in place to soften the financial blow when they reach college age, there are many investment vehicles at your disposal. All will have a lasting impact — not only on your kids but also on your pocketbook if planned ahead of time.

You might already know about the 529 plan. This plan is — by far — the most popular savings vehicle for educational expenses, especially after Congress changed the tax laws a few years back. As a California resident, your contributions are not tax-deductible; however, your growth is tax-deferred, which is similar to growth in your retirement accounts. Even better, the withdrawals are 100% tax-free if used for qualified educational expenses, which include tuition, fees, books, supplies, and certain room and board expenses. The parent or grandparent, as the account owner, directs all withdrawals, investment decisions, and even changing of a beneficiary, which can be done once annually to another family member. And yes, you read that right. Grandparents can enjoy setting these plans up, as well as parents.

One of my favorite features of the 529 is little known. That is that you can open one for yourself — and become both the owner AND beneficiary. For self-described nerds like me, this is a great way to fund future personal educational adventures. And for those who plan to be parents and want to get a jump on this big-ticket item — you can open a 529, name yourself beneficiary, and change the beneficiary when your child is born

I’m often asked what happens to the account if a child gets a scholarship or chooses not to go to college. A scholarship is actually one of the exemptions that allow you to avoid a penalty on the growth, though you would still owe ordinary income taxes on any withdrawals. Now, if your child just does not have any use for the funds and you don’t want to change the beneficiary to another family member or yourself, then there would be a penalty and ordinary income taxes on non-qualified withdrawals.

While many clients love the tax advantages of the 529, an increasing number of clients would rather trade some of these tax advantages for a less restrictive account – enter the UTMA. The UTMA is owned by a minor with an adult custodian, usually a parent.

This distinction in comparison to a 529 is important to remember. If the child is younger than age 19 (or 24 if a full-time student), a portion of the child’s unearned income may be taxed at the trust income tax rates – also known as the “Kiddie Tax”. These are the most progressive income tax rates so be careful with the kind of investments that go inside the UTMA. Taxes are therefore not deferred like they are for the 529.

With the less favorable tax treatment of the UTMA comes some flexibility. Funds can be disbursed if they will directly benefit the minor; and once the minor attains the age of majority, then the account can be used for whatever the now-adult wants to use the account for. In other words, these funds can be used for education, or they might not be.

The 529 plan and UTMA are two of the more common vehicles. With these options, young parents can approach the daunting task of saving for their children’s education with confidence — and not impoverish themselves in the process. There are others, of course, depending on the situation. All have a lasting impact - not only on your kids but also on your pocketbook. Planning ahead is half the battle.

Securities offered through LPL Financial, Member FINRA( (

Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. Gerber Kawasaki and Gerber Kawasaki Wealth and Investment Management are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures the success or protects against loss.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393