Last week, we discussed ways to contain the cost of college. This week we conclude our series on preparing for college by reviewing a few financial vehicles worth considering.
529 Savings Plan
- Most 529 plans allow you to make contributions to an individual fund portfolio, a multi-fund portfolio, or a College Target Date Series portfolio. The proceeds can be used at any accredited school in the U.S.
- The tax bill of 2017 expanded the use of 529 plans to permit funding for K-12 private school tuition (up to $10,000 per year) and certain apprenticeship programs.
- Anyone can open a 529 savings plan, regardless of how much money they make.
- High contribution limits permit you to invest until the value of the account reaches $500,000.
- Under Section 302 of The CARES Act of 2019, plan holders can now
- Use their 529 accounts to cover expenses related to any registered apprenticeship program attended by the beneficiary. This includes any additional costs such as fees, books, and other supplies.
- Withdraw up to $10,000 from their plan to pay down qualified student loans penalty free with these conditions: The first is that the $10,000 maximum is a lifetime limit for a beneficiary and each sibling. This means a family with two children can take out a maximum of $20,000 to pay down their student loans. Secondly, plan holders cannot claim any student loan interest deductions paid with this money.
- Contributions may be tax-deductible depending on your state of residence. We encourage you to speak to a Financial Professional or Tax Professional for clarification.
- Withdrawals that are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.
- You can open a Roth IRA in your child’s name. However, they must have an earned income (part-time jobs count).
- Unlike other retirement accounts, these funds can be used for qualified college expenses. If used prior to age 59 ½ for education purposes, they will have to pay taxes on the earnings, but will not face an early withdrawal penalty. If they forego college, they can continue to let the account grow tax-free until retirement age.
- Parents may also consider opening a ROTH IRA in their name and their spouse’s name. It is important to note that the IRS starts to phase out eligibility based on your Modified Adjusted Gross Income (MAGI). There are ways to circumvent this via a backdoor ROTH. Before proceeding, we encourage you to consult a tax professional or a financial professional.
Education Savings Account
- You can contribute up to $2,000 per year per beneficiary until the beneficiary reaches the age of 18.
- Contributions are not tax-deductible, and income limits apply that may reduce this amount.
- Account earnings can grow tax deferred.
- Withdrawals are tax-free when used for qualified education expenses.
Uniform Gift To Minors Act, Uniform Transfers To Minor Act UGMA/UTMA
- This is another option. When a child reaches the age of majority, they become the owners of the account since it is considered an irrevocable gift. Many parents express concern about their children walking into a windfall of money at a young age. Again, money is a tool. It can be a blessing and a curse.
Setting up a Trust
- This vehicle provides you with the flexibility to put investable assets, property, cash, etc. that clearly delineates how everything will be distributed. But, keep in mind, setting up a trust requires an attorney. This can be costly depending on the complexity of the trust. If you choose this route, it is worth paying the extra money on the front-end to make sure it is done properly.
It is never too soon to start planning for your child’s future. We encourage you to include them in this decision. It is an excellent opportunity to teach them about values, goals, and priorities. Approach it as not just another big event, but a process, a process that can benefit them beyond their college years. As the Proverb says, “Train up a child in the way they should go, even when they are old, they will not depart from it.”