I blinked, and my daughter was three and a half. They really do grow up so fast. ALL of families that I meet for financial planning ask about college planning. Whenever you decide to start saving for your child's education, it’s important to do your homework.
In no particular order here are some of the most common college savings options available:
A Drop in the Bucket
Coverdell Education Savings accounts offer a savings vehicle to help fund elementary through college, and contributions grow tax free. However, you can only contribute $2000 per year and there are income limitations for who can contribute. The overall impact that these contributions can make on the rising cost of college coupled with the limitations on who can contribute make them less popular and minimally utilized.
The Ferrari Dilemma
Yet another option is a UTMA account, formerly UGMA. Uniform gift to minor’s accounts are limited in the sense that there are limited tax benefits, you will pay taxes on the dividends and capital gains every year. The asset also becomes the beneficiaries once they reach legal age. So, if you child turns 18 and decides to buy a Ferrari instead of going to Harvard they have every right to do so with that money. Lastly it is an irrevocable gift, meaning once the assets are placed in this kind of account you cannot repaper them to be yours, ever.
The Holy Grail?
I get the most questions about 529 plans, named after Section 529 in the tax code. To oversimplify, this plan allows you save for your child’s education tax free. Qualified Education Expense withdrawals are treated as tax free from a growth standpoint. Some states even offer a tax deduction for contributions in to these plans, sorry mommas not NJ. Another benefit of the 529 is the ability to maintain control of the assets earmarked for education. I am often asked about scholarships or the off chance that a child decides not to attend college, there are provisions to accommodate both instances. New to 2017 and the changes to the tax law you can also use up to $10,000 from 529s to fund K-12 education. So, if you live in Hoboken or Jersey City or any other area that has very competitive private schooling these can be accessed for that as well.
Injuring Two Birds with One Stone
Another option is overfunding a permanent life insurance policy. This only works with permanent life insurance. The safest policies usually offer the lowest potential returns, those with equity exposure offer more volatility and risk. They do grow tax deferred, (tax free if utilized properly) and have some benefits as far as financial aid, creditor protection and international/non-education use. Other risks like overfunding, exhausting the policy and tax ramifications exist when not structured or executed properly. They also carry higher fees than some of the other options because they provide a life insurance component for the insured. One last benefit is that most offer downside protection, making it the only option listed in this article that does so.
These are some of the highlights, other considerations like liquidity, financial aid favorability and multi children or generation strategies should be discussed with a professional. My strongest recommendation is to speak to someone that is licensed and has access to all of the options above so that they can give a truly unbiased opinion.
The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation.
Amy Frank Goldman, CRPC, is a financial planner with her own firm AFG Wealth Management, focusing on investing, tax strategy, risk management and more. She works with local families to develop effective strategies for their ideal tomorrow. Amy lives in Hoboken with her husband Morgan, her daughter Stella and her pug Sophie and can often be found volunteering with local charities, working out, drinking wine or stocking up at Trader Joe’s.