College Savings: Which Account is Best?
Are you ready for these chalk boards? Starting August 1st, my Facebook feed will be bombarded with adorable images of my friends’ children and their tiny plans for the future, but what are our plans for their future?
Here are some scary numbers for you. According to the College Board the 10 year historical rate of increase for college tuition is 5%, and the average cost of tuition and fees for the 2017–2018 school year was $34,740 at private colleges, $9,970 for state residents at public colleges, and $25,620 for out-of-state residents attending public universities.
What got me thinking about this topic, besides the start of school and the fact that my 4 year old looks NOTHING like the 3 year old in the above pictures any more, was a phone call from my neighbor asking about what account to use. Currently, she has been investing in UGMA/UTMA accounts for her children. UGMA/UTMA stands for Unified Gift to Minors Act or Unified Transfer to Minor Act. The other account is a 529 Plan.
When you invest in a UGMA/UTMA account for a child, it is that child’s account. When she turns 18, that money is hers to do as she wishes. Now sweet Becky is an adorable 2 year old, but who she will be at 18 is anyone’s guess. Is she responsible enough to manage her entire 4 years worth of college tuition? What if she decides not to go to college? What if she develops a drug problem? There is nothing you can do. That money is hers from the moment it goes into the account. You cannot take it out, and you must sign it over to her at 18.
UGMA/UTMA account can be any kind of account, an investment account, a bank account, a money market account, etc. It is a taxable account, so you will pay taxes on the interest, dividends, & capital gains that occur within the account. If you decide to create a minor investment account of this type, I would highly suggest finding a professional to help manage it.
529 plan must be used for school, and the current Presidential Administration changed the law so that it can be used for Private School before college. It could always be used for college and graduate school. The benefit of this is that the funds are not taxed while they are in the account. They will grow tax free while in the account and if they gain interest or dividends, or if you sell a stock in the account creating capital gains, then you will not have to pay taxes.
The downside is if you decide to take the funds out of the account, and not use them for education, you will have to pay the taxes on what was gained over time, and you will have to pay a 10% penalty (There are a few situations where you wouldn’t have this penalty, but you would still have to pay the taxes.)
Regardless of the child’s name on the account, the person who opens it owns it. If Becky decides not to go to college, or if she drops out of school, you may use the left over for her brother’s or even cousin’s education. This gives the parent or grandparent more control over the investments.
Every state has at least one type of 529 Plan, and you do not have to live in the state to use their plan. I live in Georgia, and we have Nevada 529 Plans. We like the investment options & low fees. This is a great site comparing 529 plans https://www.savingforcollege.com/compare_529_plans/
You have the choice between direct sold or broker sold 529 plans. I like direct sold, because the broker sold have high fees, and 529 plans are pretty easy investing. You basically tell them your child’s age and the plan invests based on that age. You do not really need a broker. If you already have a trusted adviser that works with your investments that wants a different make up in your account, then I would trust them, but I do not personally think you need a new broker for just a 529 plan, if you choose the age based investment option. As I stated above, I wouldn’t go rogue and just choose specific investments or stocks willy-nilly without an adviser.
Whichever option you choose, putting a little money aside for college isn’t a terrible idea. It sneaks up on you quickly, and even a little sitting in a money market growing at 2% is better than the current world we are in where the average person coming out of school has $37,000 of student loans, which is up $20,000 from 13 years ago, so what will it be when our kids graduate?
