Education funding: 529 plans, custodial accounts, and other options.

Funding education for children or grandchildren involves choosing among several account types, each with different ownership rules, tax features, and financial-aid implications. The right mix depends on the timeline (years until the funds are needed), the source of funds (parent income vs. grandparent gifting), and the family's broader plan including estate planning goals.

529 plans — the default for most families

A 529 college savings plan provides tax-deferred growth and tax-free withdrawals for qualified education expenses: tuition, required fees, books, room and board (for at least half-time students), computers used for school, and up to $10,000 per year per beneficiary for K-12 tuition. SECURE 2.0 added two flexibility features that matter: up to $10,000 lifetime can be used to repay qualified student loans for the beneficiary, and up to $35,000 of unused 529 funds can be rolled to a Roth IRA for the beneficiary (subject to a 15-year account-age requirement, annual Roth contribution limits, and earned-income requirements). 529 plan benefits and tax treatment vary by state. Texas residents can use any state's plan; we often look at Utah, Nevada, and New York plans alongside Texas's college savings plan to compare investment options and expense ratios.

Texas-specific 529 considerations

Texas has no state income tax, so the in-state-tax-deduction argument that drives plan choice in other states doesn't apply. That frees Texas residents to choose based purely on investment lineup, fees, and account services. The Texas Tuition Promise Fund is a prepaid tuition plan for in-state public universities — useful for families confident their child will attend a Texas public school, less useful for families whose plans are more open.

Custodial accounts (UGMA/UTMA)

A custodial account titles assets in a child's name with a custodian managing them until the age of majority (21 in Texas under UTMA). Use is flexible — funds can be spent on the child's benefit for anything reasonable, not just education. Investment options are unrestricted. Trade-offs: assets count more heavily than 529 plans in federal financial-aid calculations (assessed at 20% of value vs. 5.64% for parent-owned 529s), gains are taxed at the child's rate subject to kiddie-tax rules, and at age 21 the child has full legal control of the assets — which is the right answer for some families and the wrong answer for others.

Roth IRA — the underused multi-purpose tool

If a child has earned income — a summer job, a part-time job in high school, a contribution from grandparents up to actual earned wages — a Roth IRA can be funded in the child's name. Contributions can be withdrawn at any time tax-free and penalty-free; earnings used for qualified higher education expenses avoid the 10% early-withdrawal penalty (though earnings remain subject to ordinary income tax if withdrawn before 59½). The dual purpose — retirement vehicle and education backstop — makes a Roth IRA particularly valuable for teens with modest earned income. A grandparent contribution of $1,000 a year to a teenage grandchild's Roth IRA, compounded for 50 years, is a serious estate-planning vehicle.

Direct payment of tuition — the gift-tax exclusion

Educational expenses paid directly to a qualifying institution are excluded from gift tax altogether — they don't count against the annual exclusion ($19,000 in 2026) or the lifetime exemption. This is a powerful tool for grandparents funding grandchildren's college: writing the check directly to the university rather than to the family avoids any gift-tax consequence regardless of amount. The exclusion covers tuition only — not room and board, books, or fees. Pair direct tuition payments with annual-exclusion gifts to a 529 plan for room and board to maximize what can be transferred.

529 superfund — the 5-year forward gift

529 plans allow a 'superfund' contribution: up to five years of annual exclusion gifts can be contributed in one year and treated as if spread evenly over five years for gift-tax purposes. In 2026, this is up to $95,000 per donor per beneficiary ($190,000 for a couple). The donor cannot make additional gifts to that beneficiary for five years (or those gifts will reduce the lifetime exemption), but for a grandparent doing significant education-funding for grandchildren, the superfund move accelerates compounding and removes the funds from the grandparent's estate.

Trusts — when education is part of a larger estate plan

For families with larger estates, dedicated education trusts and irrevocable trusts holding 529 plans can play a role. A 2503(c) minor's trust or a Crummey-power demand trust can hold custodial funds with more control than UTMA. These structures involve setup cost and ongoing administration; the case strengthens with larger amounts and multiple beneficiaries. Trust structures are particularly useful where blended families or specific-use restrictions matter — for example, ensuring funds are available only for accredited degree programs, or splitting evenly among grandchildren regardless of birth order.

Financial aid — how each account is treated

For federal aid (FAFSA), parent-owned 529 plans count at 5.64% of value as parent assets. Student-owned UTMA assets count at 20% as student assets. Grandparent-owned 529 plans no longer count toward aid calculations starting with FAFSA simplification (effective for the 2024–25 award year and after) — a major change from prior rules where grandparent-owned 529 distributions counted as student income. This makes grandparent ownership of 529 plans much more attractive for need-based aid families.

What a typical Houston family conversation looks like

For a couple in their 30s or 40s with young children, we usually start with parent-owned 529 plans (good balance of control, tax features, and aid treatment) funded at a rate that aligns with target college costs and the family's other priorities — retirement saving generally comes first. For grandparents wanting to help, we often pivot to grandparent-owned 529 plans (no longer hits aid) or 5-year superfund gifts. For high-net-worth families, we coordinate with the estate plan — direct tuition payments, education trusts, and 529 plans together can transfer substantial wealth tax-efficiently. The goal is enough flexibility that the plan still works if a child takes a different path than expected.