Everyone wants their kids to succeed and help them financially. As always, starting early pays the greatest benefits. Here are some timely ideas:
529 plans allow you to invest cash for school expenses tax free. These accounts are typically owned by a single parent, with one beneficiary. They are state-specific and accept high contributions.
- Almost all states offer income tax breaks for contributions to their state 529 plans.
- Nine states offer tax breaks for investing in any state 529 plan.
- Not all plans are created equal, with investment choices limited to that plan’s fund lineup.
- Most plans offer target-date funds which are a good idea to align with HS graduation.
- Distribution restrictions have broadened, now allowing up to $10K annual distributions for K-12, college apps and even exam-prep and computers.
- You don’t want to greatly overfund the accounts and may want to pair a UTMA account (see below).
- Once the accounts have been open for 15 years, you can move any remainders up to $35K into a Roth IRA for your child, once they are working. Funding is still subject to annual limits.
UTMA (Custodial) Accounts are irrevocable gifts to the minor but can accept gifted securities in addition to cash. Minors also have super low tax brackets which enable some passive gains to be realized tax free, or at a very low rate.
- Funds can be used for almost anything for the benefit of the child
- “Parental Expenses” are excluded, including food, clothes, etc.
- Eligible expenses include cars, extracurricular activities, travel and Greek life.
- They are considered assets of the child and will decrease financial aid eligibility.
- This can be a great tool for gifting appreciated stocks or mutual funds, selling with minimal taxes and using the proceeds to cover those athletic or extra-curricular activities. I know it’s pretty sad
- Grandparents and others can directly gift stocks to these accounts!
