I Need Help Choosing A “college” Fund For My Daughter?
Dec.22, 2009 in
College Selection
i want to set up a fund for her and have looked at 529, but I would like for her to still be able to use the money if she decides not to go to college maybe for a down payment on a first house. I would however like to mantain some control so she can’t use it to by a car and cloths. With a uniform gifts to minors account she gets control at 18. What would you suggest
December 23rd, 2009 at 1:10 am
The money in a 529 plan doesn’t have to be used for school.
Let’s say she doesn’t use it all and wants to use it for a house. She takes all the money out and it consists of $20,000 of contributions from you (not taxed) and $5000 of earnings (taxed and 10% penalty). Not great, but she doesn’t lose all the money to taxes. While in the account, the taxes were deferred. The compounding will sort of offset the 10% penalty, the real issue is if by taking it all at once, she gets put in a higher tax bracket than if you/she had paid taxes every year.
Alternately, put the money into a savings account with your name on it and MENTALLY earmark it for her. It stays your money and you pay taxes on it each year. If you use the money for school, you simply write a check to the school for tuition. If you give it to her for a house, if the amount is over the gift tax rules, you as giver have to fill out the gift tax form 709. (The amount over $12000 is a taxable gift. Until you have given away more than $1Million in taxable gifts, you don’t actually pay any gift tax, but as a young parent, most people don’t like to start using up a the estate exclusion if they don’t need to.)
Give the money to your daughter. $12000 a year adds up pretty quickly. If you put the money into an UGMA/UTMA, the money is still legally hers, she pays the taxes each year and yes, at 18 it’s her money and you can’t force her to use it on school. (And guess what, if the investment income is more than $1700, she uses your tax rate anyway.)
December 23rd, 2009 at 5:38 am
A little used option would be a Roth IRA.
All contributions are already taxed. You put the savings in this account (if you qualify up to 4,000 per year).
All of the earnings you leave in the account for your retirement (tax free).
You can access the contributions you put in at anytime. You can use the funds anyway you choose.
A little more aggressive twist….
I’m not up to speed on the current student loans, but if you can find one like I had …you can borrow and interest doesn’t start until you leave school.
You could have you child borrow and start paying this down with the IRS allowable gift portion a year or two into school. This would allow you to make more earnings (interest) for your retirement.
December 23rd, 2009 at 10:32 am
To piggy back off of VB, for the UTMA account, she would have to take you to court to get control of it (most financial firms require consent from the custodian to terminate custodianship). Also, depending on the state, the age of majority could be 21. In California’s case, you can have that age pushed back to 25 (you’ll have to stipulate that when opening the account).
Bad side of UTMA is that the money will be considered as her’s when she applies for financial aid (so it could potentially destroy that option). Also, if you die, then the money in the UTMA account would be considered when calculated your estate’s worth.
Personally, I have my son’s college fund predominately in a State sponsored tuition pre-pay program. That strictly covers tuition. For other educational expenses, I have a Coverdell Educational Savings Account. These are currently on their way out because of the rising popularity of 529 plans, but I prefer them because I have more investment control. For non-school expenses, I have a UTMA account open for him. That is more of a gift for when I feel he can handle money.
If you are not huge in investing, then a 529 would probably be your best option.
December 23rd, 2009 at 10:46 am
bet on red 5. It will hit, I promise. Then let it ride.