Education Fund For Grandkids

[Musica40]

Hope I am asking the right groups. My wife and I opened an education account for our two grandsons. Our son asked if there was any way that we could switch this to an UTMA. It is a Uniform Transfers to Minors Act,. The reason he asked was because he feels that a college education is not as important as it might have been 20-30 years ago. He also feels that maybe by the time the kids are eligible, they may choose to not got to school and do something else with their lives. Our oldest grandson has medical issues that might prevent him from going to college. He is however starting to be a very good artist and this might be his future. We would like to withdraw the funds from the ESA and transfer to the UTMA so that they have the option of doing what they wish when that time comes. The oldest is 10 and the youngest is 6 years old. Any thought or advice would be greatly appreciated.

 

[pb4uski]

We didn't do 529s for our kids and I'm glad we didn't. By the time DD ent to college we cold pay tuition from cash flow and other savings and DS decided not to go to college so that money would have been taxed when withdrawn. I just don't think the tax-free growth is that big a deal for that amount of money.

I'm not keen on UMGAs either. Once the grandkid is 18 they have total control.

I would just earmark a portion of your savings for the grandkids education and perhaps make them or a trust the beneficiary of those accounts.

I recently inherited a Roth IRA and will be investing it aggressively for the benefit of the grands.

 

[target2019]

I've been looking at various accounts we can set up for grandchildren. What I've decided is that we as grandparents will consult with the parents, but make our own decision.

There are many articles written, and other threads here about this subject.

https://www.bankrate.com/investing/529-vs-utma-ugma/

Even if your grandchild is an artist, many successful artists go for BFA Bachelor of Fine Arts. This is a good idea since no one can guarantee that their choice of field will lead to success. A broad education makes sense. Look at schools such as Rochester Institute of Technology for ideas about curriculum.

My son-in-law has brought up similar issues, and that general funds may be more useful.

We had UTM and 529 accounts for our children. That gives you more flexibility, in my opinion.

You also should be aware of recent changes to 529 rules.

As always, more reading and discussion may lead you to a better decision.

 

[folivier]

When my 2 sons were infants my dad set up a UTMA for each. Over the years we contributed a bit here and there. Both earned full ride scholarships so didn't use their UTMA funds. After they graduated we told them of these and they each used it for a very nice down payment for their first houses.
We have started UTMA's for each of our grandkids and just transferred an additional $300 each for this Christmas.
Remember you don't have to tell your kids or grandkids about the UTMA until you decide to.

 

[pb4uski]

... Remember you don't have to tell your kids or grandkids about the UTMA until you decide to.

But the financial institution has record of the kid's birthday and after they turn 18 you can no longer access the account since it is legally theirs... I heard of this happening to someone recently... they lost access to the UMGA account after the kid's 18th birthday.

 

[gauss]

If I am not mistaken, the gains on ESA and 529 funds (but not the basis) withdrawn and not used for educational purposes will be subject to ordinary income tax rates (plus a 10% penalty). The UMTA, on the other hand would allow capital gain rates treatments for the growth of the investment if it is capital in nature.

-gauss

 

[Dash man]

We’ve chosen to fund both 529 accounts and custodial accounts for our three grandchildren. If they choose not to go to college, they may want a trade school. If not used, $35k can be used to fund a Roth after 15 years. Accounts can be changed to other beneficiaries such as nieces and nephews, or our grandchildren’s children. It may not get used in our lifetime, but it’ll get used.
The custodial accounts will help for a first home or car purchase. We won’t tell them about it until they’re at a point where they need it. Parents know about them.
We feel these accounts give them more options as they begin their lives.

 

[punkinhead]

Our state gives us a 20% tax credit for 529b contributions. That's something to factor into your decision if you're in a state that offers something like that.

 

[athena53]

Most of my grandchildren's funds are in 529s but I'm doing something different with the UTMA accounts. The two older kids (girls ages 9 and 7) have small UTMA accounts and they've chosen stocks based on a very small list of familiar brands I've provided (Starbucks, Costco, Apple). I'll start with their little brother when he's old enough to understand what it means to own small pieces of a company. I'm not terribly concerned about what happens when they turn 18; their parents are excellent role models. They shop around, look for deals on used versions of the things the kids want, etc.

This discussion does make me realize I probably don't want to have enough in the 529s to send 3 kids to Harvard when the time comes. I'm guessing they'll be accumulating college credits at the local community college during their HS years (they're now home-schooled) and one or more may decide to live at home rather than go away to college. That could be offset by one or more wanting to go to graduate school.

I still have time to figure it out.

 

[Rocky mtn high]

We set up 529- they can be used for trade schools not just 4 yr colleges. I assume that if the grand children does not go to college they will still want some kind of education.

 

[target2019]

Note that there are significant changes to 529 rules include the following:

KEY TAKEAWAYS

• Federal tax laws passed in 2017, 2019, 2020, and 2022 added several new tax benefits to 529 plans.
• 529 plans can now be used for K–12 expenses, not just for college and other postsecondary education.
• 529 plans can also be used to pay off a portion of student loan debt as well as for vocational school expenses.
• Grandparent-owned 529 accounts are also scheduled to get a tax break under rules to be implemented in upcoming years.
• Up to $35,000 of a 529 account can be rolled into a Roth individual retirement account (Roth IRA) starting in January 2024.

https://www.investopedia.com/person...ment account,of the 529 account's beneficiary.

 

[pb4uski]

I had not heard of that last part... interesting. From Bard.

Currently, in December 2023, you cannot directly use a 529 plan to fund a Roth IRA. However, starting in 2024, the SECURE 2.0 Act allows for a new type of qualified distribution from 529 plans: rollovers to a Roth IRA owned by the 529 plan beneficiary for tax- and penalty-free purposes.

Here's how it will work:

• Lifetime limit: You can roll over up to $35,000 per beneficiary from a 529 plan to a Roth IRA.
• Account age: The 529 plan must have been open for at least 15 years.
• Funds in the account: The rolled-over amount must have been in the 529 plan for at least 5 years.
• Contribution limits: The rollover amount is subject to annual Roth IRA contribution limits ($6,500 in 2023, $7,500 for individuals aged 50 and older).
• Income limits: Roth IRA income limits do not apply to this type of contribution.

This new provision offers additional flexibility for 529 plan owners and beneficiaries. It can be helpful in situations where:

• The beneficiary does not pursue higher education.
• There are leftover funds in the 529 plan after education expenses are covered.
• The beneficiary would be ineligible to directly contribute to a Roth IRA due to income limitations.

Important note: While this option becomes available in 2024, consulting with a financial advisor for your specific situation is always recommended. They can help you understand the potential benefits and drawbacks of using a 529 plan rollover to fund a Roth IRA and other options you may have for your financial goals.

I hope this clarifies the current and future possibilities for using a 529 plan to contribute to a Roth IRA!

 

[athena53]

529 plans can now be used for K–12 expenses, not just for college and other postsecondary education.

Oh, yeah- I forgot about that. If the time comes when they want to send the kids to a formal school, their public school system is pretty poor (one reason they got a good price when they bought the house) and this gives them options.

 

[kgtest]

In my state we can choose a deduction or a credit for our 529 contributions. SO I put in $1,000 into all 3 kids 529. I get $500 tax credit, and so do grandparents. If one kid does not use it and none of the kids do not use the 529s then I believe you can now convert the 529 to a Roth somehow. Not sure the details but that would be the plan.

 

[misanman]

Can't really speak to the UTMA as we have done 529s for the ten grandkids. Five have used it so far and it has worked well. We get a related state tax deduction. DS2 has an art-related career but he completed a MFA so I'd want to have some clarity on how much the career depends on talent versus education.