Many people want to be prepared to pay for their children’s college expenses, but what if they decide not to go to college? There are many different ways that parents can save for their children’s college expenses; each has its pros and cons.
College 529 Plans:
A 529 plan is simply an investment account that offers tax breaks when the money is used for qualified education expenses like tuition, fees, books and other supplies, and room and board. Money inside a 529 plan grows tax-free, and money can be withdrawn tax-free for qualified education expenses.
While 529s are great if you are CERTAIN your child is going to college, they have major issues if your child does not go to college or doesn’t need the funds because of scholarships. In addition, 529s could reduce your child's need-based aid. Plus, there are penalties for noneducational withdrawals, and you have less say over your investments.
Parents could opt instead to open a Custodial UGMA and UTMA account, which can be used for purposes other than education. Roth IRAs are another option that has tax advantages similar to 529 plans—and they don't count as assets for financial aid purposes.
UTMA/UGMA Account:
The most common trust for a minor is known as a custodial account (an UGMA or UTMA account). The advantage is that the account is taxed at the child’s rate as it grows. The pitfall of this type of account is lack of control after the child turns 18.
Roth IRA:
A Roth IRA is a special retirement account where you pay taxes on money going into your account, and then all future withdrawals are tax-free. These accounts allow you to take withdraws prior to age 59½ for a few reasons, one of which is for your children’s college education.
Regular Brokerage Investment Account (with TOD):
If taxation is not your primary concern and you desire more control over how your child uses the money, whether it’s for college or something else, then I believe this is the best option. This option gives the parents complete control even beyond age 18, does not impact the child’s ability to qualify for financial aid, and does not limit the investments or the withdraws. The only drawback to this is that the parents will pay taxes on the growth as it occurs.
Mark A. Johnson is a financial advisor with Heartland Wealth Management., 251 W. Rock Creek Road, Norman. For more information, visit 405.561.7051.