Three Accounts You need to Know About for your Child’s Future
If you’re a parent, the question has probably crossed your mind, “If my child decides to go to college, how am I going to pay for my kid’s college?” The cost of college has skyrocketed leaving many parents with this daunting question.
In addition to praying to the scholarship gods, we are going to outline the pros and cons of tour other ways you can jump start your child’s college savings.
Before we dive in – one note: the decision to pay for (or not pay for) college is based upon each family’s circumstances and values. While we believe a little planning can go a long way when your kids are little (hello compounding interest!), this is a very personal decision for each family and there is not a cookie-cutter “right” answer.
Here are three types of accounts to consider:
College Savings 529: The 529 plan is a widely recognized state-sponsored investment vehicle designed to accumulate funds for educational expenses. Contributions are made with after-tax dollars, but the account's growth is tax-free, with no taxes on distributions for qualified expenses. In some states, such as Georgia, contributors may also benefit from state income tax deductions. However, it's crucial to research investment options and understand associated fees to optimize returns. Moreover, funds in a 529 plan are primarily earmarked for educational purposes, with restrictions on usage if your child opts out of college or secures alternative funding.
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA): UGMA and UTMA accounts are established in the child's name, with a designated custodian overseeing the account until the child reaches the age of majority. One significant advantage of these accounts is that they are taxed at the child's lower tax bracket. Additionally, there are no contribution limits, although larger gifts may have implications for gift taxes. However, once the child gains control of the funds, they have the discretion to utilize them for college expenses or other purposes, potentially deviating from the intended use.
Individual Brokerage Account: While there are not as many initial tax advantages, the other option is simply opening another investment account in your name and contributing with the intentions of using it for your child’s college. That way, you can fund college from that account, but have the flexibility to use it in other ways if they don’t need it. See more on these types of accounts here.
When contemplating how to finance your child's college education, it's crucial to explore various savings avenues and assess their alignment with your family's goals and circumstances. Whether opting for a 529 plan, UGMA/UTMA account, or individual brokerage account, each strategy presents unique advantages and considerations. By engaging in thoughtful financial planning and considering the long-term implications, you can navigate the complexities of college financing with confidence and clarity.
