Best savings, trust, 529 plans for children?

Question

Our first baby is due any day and we are looking to set up some kind of savings fund for him, but with all the options out there we'd like to hear what parents in similar situations have done. Obviously, our final decision will be made when we speak with our financial advisor, but I prefer to go to those meetings armed with as much information as possible.

Here's what we're looking for:

-No UTMA's. We're not setting this up so he can live it up in Vegas for a month upon his 21st birthday.

-We respect that he might not want to go to college, so ideally the account should be flexible in its uses. Wedding, home buying, retirement, etc.

-Preferably having some tax incentives.

We've discussed a lot of options so far and aren't even opposed to setting up multiple accounts to get "the best of both worlds" if you will. We just want to hear what other parents have done for their children, and how it worked out.

Answer 1

If you are not presently funding your (or your wife's) ROTH IRA, you can use it to save for your child. Investments grow tax free, and qualified withdrawals are tax free. You can make a withdrawal of your contributions at any time without tax or penalty. You can make withdrawals for education (of your child) tax free.



Using a ROTH would allow you to save for your child, maintain control and ownership of the account, and withdraw funds to give to him (her) when you are ready. 2 main drawbacks - - you are limited to a $5.5K per year contribution, and you may not be able to make withdrawals of EARNINGS without penalty before 59 1/2.



I personally used UGMAs (UTMA) for all seven of my children. 5 of 7 have reached 21. One used the money and finished engineering grad school, one made a down payment on their house, and the the 3 accounts are still in-tact.



We used the UTMA because it offered the most flexibility and investment choices. It could be used for nearly any expense of the child (education, car, travel). While there is the risk of having a 21 year old who "blows it" - - nearly all of your choices do (aside from a trust with contingencies - - - think big bucks to set up, maintain, and pay a trustee). Depending on how much you want to save, the ROTH may work for you.



Of course if we're talking about REALLY big bucks (in the $100K range) - - I can't help. In that case, you need an attorney in addition to a fee based planner.



You probably already know this - - but if your "financial planner" is not fee based, their knowledge and available product will be limited, and you may not be getting the best advice. (When the only tool you have is a hammer, every problem begins to look like a nail).

Answer 2

1) I would still ensure that you and your spouse are maxing out your retirement accounts and liquid savings first prior to providing for college savings for your kids. If something happens to you guys they can always take out loans but you can't make up that lost savings time.

2) 529s savings plans are going to be your best route since the growth will be federal tax free if withdrawn for educational savings purposes. The savings plans have better flexibility than the prepaid credit plans since those are state specific so you really box your kids into going to one of a select few schools by investing in that. The savings plans can be used at any institute within the U.S.

They will also not be factored into your portfolios for student loan programs, so if you can't finance them wholly those 529 plans won't be factored into your applications as an asset, so they should qualify for more.

If they decide they really don't want to go to school, they can just take the distributions out when they need for normal expenses and just pay normal federal taxes on the growth that they would have anyway if it was just in a brokerage...there is no additional penalty for the withdrawal. Or, you can also transfer to a different child of yours that does want to go to college, with no penalty as well.

3) UTMAs are fine for their normal smaller scale savings. You can use those for depositing gifts or for small annual deposits you want to give them outside of normal college savings.



That should be a good start, take care.

Answer 3

I always recommend U S government Series EE or I bonds. Not exciting, but fully guaranteed. You can give them to him when you think he can handle / needs the money; there is no UTMA paperwork, and with a teenagers low income, most probably no tax will be due on the interest, and there are no encumberances on the money.



Now, if you are sure he was going to college ... get a college plan.