College Savings

Establishing a savings for your child’s college is a very admirable goal. And there are many vehicles to fund this goal. We believe it is important to provide the greatest opportunity for our children. Higher education or learning a specific trade or skill gives them a better opportunity to succeed. 

Can I just put some money aside for my child?

 Yes, you can do so through individual savings and or investment accounts held in your name. Though this is not the most tax efficient it is the least complicated and there are no rules to deal with. All earnings on the savings or investment are taxable in the year the earnings were made at the parent’s tax rate. If the child does not go to college, you can give the money to them or you can keep the money for yourself. 

What is an UGMA? Can it be used for college savings? 

The Uniform Gift to Minors Act account, commonly referred to by its acronym UGMA and UTMA depending on who you are talking to. In the past this type of account was used to transfer wealth from one’s estate to the children. Often, the funds transferred to the account are used for college. The investments in the UGMA account are taxed at the child’s tax rate only if the earnings exceed $1,050 in a given tax year. The parent is the custodian of the account and controls access to the funds up to and until the child turns 18. Once the child turns 18, the child has full control of the account and can spend the money as they wish. The parent loses control. There is a maximum of $16,000 gift per year which can be made to an UGMA account, $32,000 for married couples. 

What is a Coverdell IRA?

The Coverdell IRA works much like the Traditional IRA, the owner receives a tax deduction in the year of the contribution and the investments returns grow tax free if the distributions are used for qualified education expenses. The parent can change the beneficiary if the first child does not attend college or if the funds are not completely depleted when that child graduates. The maximum contribution is $2,000 per year. 

Why is the 529 College Savings Plan so popular? 

529 College Savings Plan is probably the best program available. Contributions are made with after tax dollars. There is not a tax deduction up front, but the investments earn tax free if distributions are used for qualifying higher education expenses. A parent is made the custodian and the child is the beneficiary. The parent/custodian maintains absolute control of the funds in the 529 plan. If the child never attends college or any form of higher education or if the funds are not depleted by the first child, the parent/custodian can change the beneficiary to another child, relative or non-relative. And the first beneficiary can receive nothing. The change of beneficiary does not cause a taxable event. 

If no family member goes to college, the parent / custodian may distribute all funds, pay a 10% penalty on the earnings plus their normal income tax rate. The maximum one-time contribution is $80,000 per parent, $160,000 for married couples, for a five-year period. Otherwise, the maximum contributions fall back to the $16,000 annual gift limit per parent, $32,000 for married couples. 

When should I start a college savings account? 

As soon as your child is assigned a social security number. Sooner is always better. 

The Callaway Approach 

College Savings means different things to different people. For some, it means the accumulation of money for their children’s education. For others, it may be their child’s the key to a prosperous future. A superior education may present greater choices to fulfill their child’s dreams. You probably have a mental picture of what you want child’s future to look like. Your child probably has a much different view. 

No matter what education or vocation they choose, by you funding the necessary savings to provide for their education you will pave your children’s way to a successful career. Not everyone is able to earn a full scholarship nor obtain a grant. 

Loans for tuition have become an incredible burden to our young graduates. In fact, I have a friend in his 60’s who to this day has not paid off his student loans and I making less money than when he first graduated from college. 

Our job prospects have changed dramatically. The hard reality is you will need money to help your children prepare for their careers. And special care will need to be made to weigh the cost versus the job prospects and ultimately your child’s future paycheck.

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