With graduation season in full swing, many are reminded of the soaring costs of higher education. According to a U.S. News & World Report Study, average tuition and fees at public four-year institutions have more than doubled over the past two decades. Private nonprofit colleges continue to outpace public schools in cost, making strategic planning around college funding more important than ever.
If your retirement savings are secure and you are considering leaving a financial legacy for your family, contributing to a loved one’s college expenses can ease their financial burden while also providing estate and tax planning benefits. Here we explore several savings options, tax-efficient gifting strategies, and alternative tools like municipal bonds and Roth IRAs that can help support education costs.
529 College Savings Plans
529 plans are among the most popular and flexible tools for college savings. These state-sponsored accounts allow for tax-free growth and withdrawals when used for qualified education expenses, including tuition, books, and room and board. A key advantage is their flexibility: they can be used for college, vocational schools, and up to $10,000 annually for K–12 education.
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Recent legislation has further expanded 529 plan flexibility. If a beneficiary does not use all the funds, e.g., due to scholarships or choosing a more affordable school, up to $35,000 can now be rolled over to their Roth IRA, provided the account has been open for at least 15 years and the beneficiary has earned income.
Gifting for Education
Beyond 529 plans, direct gifting offers another pathway for supporting college costs while reducing your taxable estate.
In 2025, individuals can gift up to $19,000 per person annually without incurring federal gift tax ($38,000 for married couples). These gifts are excluded from your lifetime gift and estate tax exemption. More significantly, tuition payments made directly to a college or university are not considered gifts at all, no matter the amount. This “tuition exclusion” allows you to pay substantial sums without impacting your gift tax limits.
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Municipal Bonds: A Conservative Option
Municipal bonds, debt securities issued by state and local governments, are another strategy for college savings, particularly for those seeking low-risk, tax-efficient income. Here, a person would (1) set up an account with some or all of the full cost of four years of tuition in cash, (2) purchase four in-state municipal bonds with par value covering all or part of the expected tuition payment for each year of college, and (3) match the maturity to spring of each of the four years starting when the student is expected to graduate high school. The income from the bonds would be reinvested, or swept, into a municipal money market vehicle throughout the holding period. Provided the bonds are held to maturity, the return is locked in at the yield to maturity at the time of the initial investment and all of the return is exempt from federal and state income tax. So, for example, if a family started with $200,000 +/- in cash, each spring the family would have $50,000 in proceeds from the maturity of that year’s municipal bond, plus all or a part of the income generated and held in the money market account along the way, to be spent on that year’s tuition. While municipal bonds do not offer the same targeted tax benefits as 529 plans, they provide predictable tax-free return that can be used toward education or other expenses.
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Roth IRAs for Minors
If a child or teen has earned income from a job, consider opening a custodial Roth IRA on their behalf. While primarily a retirement tool, Roth IRAs offer long-term growth potential and flexible withdrawal options.
In 2025, contributions can be made up to the lesser of the child’s earned income or $7,000. Although designed for retirement, contributions (not earnings) can be withdrawn at any time tax and penalty-free. Withdrawals for qualified education expenses are also exempt from the 10% early withdrawal penalty, although income taxes may apply to earnings.
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Final Thoughts
Helping a loved one save for college can have far-reaching benefits, but it requires careful planning. Whether you use a 529 plan, direct gifts, municipal bonds, or Roth IRAs, be sure to align your giving with your broader financial goals. Communicating openly with your family and consulting a financial advisor will help ensure your contributions support both education and legacy objectives without compromising your own financial security.
For more guidance or personalized advice, please reach out to your Relationship Manager or visit a trusted resource like Mefa.org.
