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Saving for Education

Financial Advisor Offers Tips on Starting a Savings Account for Your Children When They're Young

Becoming a parent is one of the most exciting and scary times in one’s life. Paying for the hospital bill, diapers, car seats and all the needs of an infant can seem daunting. So much so that new parents rarely start to consider saving for college right after a child is born.

Kevin Naef, Financial Advisor for Edward Jones in the West Valley (EdwardJones.com or at 623.974.0040), understands first-hand what new parents are experiencing.

“We were so excited and, like a lot of people, we wanted to give our new baby daughter everything, including an education. College is expensive, so planning for education when we brought our bundle of joy home was key.”

Naef offers some insightful and timely tips for planning for college:

Q: What are some of the best ways to start putting money aside for college?

A: If you have young children (or grandchildren), you may be thinking of ways to save for their future educational needs.

You might consider a 529 plan, which offers tax advantages and other benefits. But a 529 plan also brings with it a key question: Who should be the owner?

You could choose to own the 529 plan yourself and name a child as the beneficiary. Or as the owner, you’re free to name another family member as a beneficiary if the original one chooses not to use the 529 plan assets for qualified educational purposes. You can also designate a successor owner so that the assets won’t have to go through probate if you pass away.

Alternatively, you could establish a custodial account. In that account, the 529 plan is owned by the minor child, who is also the beneficiary, and the child gains full control of the account once they are of legal age. Until the child reaches this age, you as custodian, control the account and can designate a successor custodian to step in should you become unable to care for the financial account.  

There are also traditional, parent-owned plans. The ownership model won’t affect the amount accumulated in the plan, and the custodial and traditional arrangements will have the same impact on the beneficiary’s eligibility for need-based financial aid.

Q: So which is better, a traditional or a custodial 529 plan? 

A: There’s no one right answer, but there are a few things to keep in mind.

  • Taxes – If you move assets into a custodial 529 plan, you could incur taxes and should consult with a tax advisor.
  • Beneficiary’s Control of Assets – Upon reaching 18 or 21, a child gains control of a custodial 529 account and can use the assets for any purpose. If the money isn’t used for qualified educational expenses, the child will incur taxes and penalties.
  • Grandparent ownership – Grandparents can choose to own a traditional or open a custodial 529 plan account for a grandchild. A grandparent-owned 529 plan’s distributions could hurt a student’s eligibility for need-based federal financial aid, but distributions from a custodial 529 plan account are not reported on the FAFSA. However, if you’re a grandparent, and you’re considering opening a 529 account, you might want to check with a school’s financial aid office well before the money is needed.

Naef stresses it is important to think carefully before deciding on the ownership of a 529 plan and get the help you need from your tax professional and financial advisor. A 529 plan can be a valuable tool, so you’ll want to maximize its benefits.

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