Need help on college saving option???

[huutrinon]

Hi,
Hopefully

 

[FinanceDude]

529 plans work well. It depends on what state you live in, although you can invest in any 529 plan offered in any of the 50 states. Sometimes you get a tax break for investing in YOUR state's plans.

Be careful with custodial accounts (UTMA/UGMA), when your kid turns 21, they can get the money and spend it ANY WAY they want, unlike the 529........

 

[youbet]

Don't forget to check out Coverdell ESA's, formally known as Educational IRA's. Limited to $2K/yr but very flexible as to your ability to self-direct. Also can be used for private elementary school or high school as well as college.

 

[TromboneAl]

Don't utma.

 

[RetireeRobert]

Be careful with custodial accounts (UTMA/UGMA), when your kid turns 21, they can get the money and spend it ANY WAY they want,

That is, if they know the UTMA or UGMA account exists!

 

[youbet]

That is, if they know the UTMA or UGMA account exists!

At 21, if they don't know it exists, who pays the taxes?

 

[RetireeRobert]

At 21, if they don't know it exists, who pays the taxes?

I was just being facetious.

But practically speaking, even though the UTMA/UGMA would be set up with the child's SSN as primary, chances are the parents were doing the tax returns for them and paying the taxes in actuality for the child.

One would hope at 21 the kids would start getting educated about the IRS and about doing tax returns for themselves, but that doesn't always happen. In which case they may really not know an UTMA exists for them if no one tells them. (And the parents have to keep handling the tax prep chore for them, which can be the case!).

But back to danger of kids spending their UTMA money on frivolities if they DO know they have one. If parents spent years funding an UTMA account for the kid to pay for college, likely the kid is going to be raised with the expectation of going to college. The parent can control the funds up to age 21 and get the kid most of the way through college. Then if there are still UTMA funds left, a kid most of the way through college has already demonstrated the ability to study, to perservere, to "want" to finish college. Giving them complete control of those UTMA funds at 21 under these circumstances seems not really a gamble.

And if they have not demonstrated the desire or ability to stay in college up to age 21, then they may be destined for another road in life anyway. In which case a parent simply has to accept that, see those UTMA funds used some other way, and accept that kid is taking a different road.

 

[youbet]

I think what you just said was that if you place funds in an UTMA for a child, the child, upon reaching age, may use the funds for purposes other than what the parent intended........... and the parent just needs to accept that. I agree. And that's why I wouldn't use an UTMA. The tax savings just aren't worth it.

 

[RetireeRobert]

I think what you just said was that if you place funds in an UTMA for a child, the child, upon reaching age, may use the funds for purposes other than what the parent intended........... and the parent just needs to accept that. I agree. And that's why I wouldn't use an UTMA. The tax savings just aren't worth it.

You ignore the parent can have spent "most" of the UTMA finds to get the kid "most" of the way through college by age 21. It is not the case the kid gets *all* of the UTMA money to blow on frivolities at age 21--most of it can have been spent prudently under the parents control before child reaches 21. If not for a college bound kid, if that seems his/her fate, then on some other "prudent" expenditures for that child.

I am not arguing UTMA/UGMA the best or only way to fund college, just want to explore ramifications peculiar to UTMA/UGMAs.

What would you use to fund for college, and where would that money end up if it turns out the kid demonstrates neither the ability or desire to stay in college and finish?

 

[youbet]

What would you use to fund for college, and where would that money end up if it turns out the kid demonstrates neither the ability or desire to stay in college and finish?

For my son, I used my checkbook. If he hadn't wanted to go, or if he dropped out, I wouldn't have written checks or would have stopped writing checks.

For the grandkids, I'm using Coverdell ESA's. They're 6, 5 and 2 yo right now, so no clue if they'll be college material or not. But with Coverdells, you can fund elementary, secondary, or post secondary education and many types of vocational training. So, we can start withdrawing/spending early if that looks appropriate. If one doesn't use his/hers, it can be transferred to another.

If the Coverdells aren't enough, and they probably won't be, I'll write checks. If I'm dead by then, their dad will write the checks with money he inherited from me.

UTMA's just don't save enough tax dollars to be worth it, IMHO.

 

[RetireeRobert]

UTMA's just don't save enough tax dollars to be worth it, IMHO.

And they changed tax laws again about taxation of kids. Used to be kids 14 and over were taxed at their own rates, instead of parents. Then they changed it for 2007 up to age 18. And for 2008 and beyond I think it goes up above age 18. That kind of screws up any UTMA capital gains getting the kid's favorable tax rates.

Dang tax laws. They are ALWAYS changing--usually for the worse.

 

[youbet]

Yeah, I couldn't justify the UTMA with the 14 yo rule, but at 18, it's really a stretch.....

""Kiddy Tax"
Previously, children under the age of 14 were taxed on their unearned income at their parents' highest marginal tax rate. TI PRA raised that age from 14 to 18, and as a result, a child's unearned income may be taxed at up to a 35% tax rate, instead of a 10% or 15% tax rate, for an additional 4 years. (There are exceptions for married children who file a joint return, or to certain distributions from qualified disability trusts.) To add insult to injury, this provision is retroactive, effective January 1, 2006, making it more difficult for parents who expected the "kiddy tax" burden to end once their child turned 14."

Ruden McClosky -- Florida and South America Full Service Law Firm. - Attorneys At Law

 

[Danny]

If possible working for a member school in the Tuition Exchange program can solve the question of how to pay for tuition. The money is tax free.

 

[RetireeRobert]

If possible working for a member school in the Tuition Exchange program can solve the question of how to pay for tuition. The money is tax free.

There is also the WUE program--Western Undergraduate Exchange program for western states state colleges (WA, OR, CA, ID, MT, AZ, and maybe a few other states). Under this program, if your kid goes to state system school in a neighboring state, they don't have to pay non-resident tuition rate, but get a lower rate about halfway between reisdent and non-resident tuition. Quite a savings if your kid is intent on going to an out-of-state college. There may be similar programs in other regions.

 

[RetireeRobert]

There is also the WUE program--Western Undergraduate Exchange program for western states state colleges (WA, OR, CA, ID, MT, AZ, and maybe a few other states).

WUE link: WICHE - Student Exchange Programs

 

[ERD50]

One would hope at 21 the kids would start getting educated about the IRS and about doing tax returns for themselves, but that doesn't always happen.

Slightly off topic, but I think about this from time-to-time.

My folks had a tax accountant, and I remember my Mom saying, 'just give me your W2, our tax guy will do yours too'. And I remember thinking, hmmm, if anyone is going to get a share of my money, shouldn't I be involved in the process? So I did them myself. I think that was one important step in FIRE. It helps to understand what is happening to your money.

I find that many people have no idea about making tax-efficient decisions, because they hand their taxes over to someone to do. In another thread a while back, someone said it is best to start early in life while your taxes are simple. It is easier to grasp all the complexities when they are added a bit each year. That was my experience.

I still do my kids, they are in HS and College. When they get their first full time job, I'll offer to show them how to do it, and explain as we go. We could even do that cross country if needed, with this amazing tech we have today.

-ERD50

 

[RetireeRobert]

.........And I remember thinking, hmmm, if anyone is going to get a share of my money, shouldn't I be involved in the process? So I did them myself. I think that was one important step in FIRE. It helps to understand what is happening to your money.

I find that many people have no idea about making tax-efficient decisions, because they hand their taxes over to someone to do. In another thread a while back, someone said it is best to start early in life while your taxes are simple. It is easier to grasp all the complexities when they are added a bit each year. That was my experience.

-ERD50

I think you're right about that.

 

[jazz4cash]

Slightly off topic, but I think about this from time-to-time.


I find that many people have no idea about making tax-efficient decisions, because they hand their taxes over to someone to do. In another thread a while back, someone said it is best to start early in life while your taxes are simple. It is easier to grasp all the complexities when they are added a bit each year. That was my experience.

-ERD50

I agree, also! In fact, I can tell that I am losing my 'edge' by using Turbotax but would not give it up.

 

[ERD50]

I agree, also! In fact, I can tell that I am losing my 'edge' by using Turbotax but would not give it up.

Yes, at first I thought the programs were pretty good, but now they seem to try to over-automate it, and I don't know what is going on 'under the hood'.

Crazy that we should even need a program to give the govt money, it should be simple. Oh well, there is another thread going on about the NST or 'fairtax', so I'll stop now...

-ERD50