According to the latest College Board analysis, the average cost (tuition, fees, room and board) for a public, four-year, in-state institution topped $17,800 for the 2012–2013 academic year. And that figure is a bargain compared to out-of-state or private four-year institutions, averaging $30,900 and $39,500 respectively for the same school year. In the face of these sobering numbers, you want to squeeze every penny from the savings you set aside for college funding. What’s your best course of action? There is no one-answer-fits-all, but here are considerations to help you make the best choices for you and your family.
529 Plans: Often the Right Tool for the Job
Named after the Section 529 Internal Revenue Code allowing for them, the 529 college savings plan exists specifically to help families save for the costs of higher education. Given its dedicated mission, a 529 plan is often a good, first solution to consider when saving for college.
Tax-treatment – For federal income taxes, 529 plan assets grow tax-deferred and are tax-free when you take them out … as long as the distributions are used for particular college costs.State tax benefits vary from state to state; in Michigan, for example, there is a state tax deduction for contributing to a Michigan account.
Donor/beneficiary control – The assets are earmarked for your beneficiary’s higher education costs, but you, the donor, retain nearly complete control over when withdrawals are made and how they are spent. As a side note, your beneficiary need not be your child. Think, grandchildren, godchildren, other family members … even yourself. In addition, you can change beneficiaries as evolving needs may warrant.
Investor-friendly opportunities – Although each state sets up and manages its own 529 plan program, you do not have to use your state’s plan. We encourage you to shop nationwide to find the best program for you and your needs. In keeping with our recommended investment philosophy, we recommend seeking a plan that offers low-cost, index-based solutions that help you manage your investments and net the best after-tax returns given your particular goals.
Flexibility – Overall, 529 plans are built for relative flexibility, since personal college plans can shift and evolve over the years. For example, as touched on above, there is a fair amount of latitude in terms of naming a new beneficiary or periodically shifting among state plans. The amount you can invest in a 529 plan is generous as well – enough to cover the costs of the loftiest academic goals – with no age or income limitations.
Considering UGMA/UTMA Accounts
Even with the 529 plan’s relative benefits, it may not always be your best choice. Your financial or estate-planning circumstances may generate legitimate reasons you want to avoid locking in assets for the single purpose of higher education. When such circumstances arise, another option is Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts (or other forms of trusts or gifting).
Tax and college aid treatment – UGMA/UTMA accounts are not tax-deferred. How much of the income is taxable depends on the amount generated and the minor’s age. While the tax savings are often attractive, it is important to consider the impact it may have on financial aid eligibility. Consulting with tax- and financial professionals is usually well-advised.
Custodian/beneficiary control – UGMA/UTMA accounts are best used when you intend for your child to gain control over the assets once he or she reaches adulthood (18 to 21, depending on the state in which the account is established). It provides the ability but not the obligation to use those funds to pay for education expenses.
Investor-friendly opportunities – Unlike a 529 plan, where you’re limited to the solutions available within the plan you’ve chosen, you have complete flexibility on the investments you place within an UGMA/UTMA account. Regardless of the account type, we again encourage seeking low-cost, index-based investment solutions.
Flexibility – Your beneficiary is not pigeon-holed into spending UGMA/UTMA assets strictly on higher education, as he or she is with a 529 plan. But there are other limiting factors to be weighed. For example, once established, the account is irrevocable and specific to the named beneficiary.
Taking Next Steps
Clearly, there is much to be considered when planning for college savings. To initiate your own exploration, here are a couple of good resources offering objective, well-researched information on the subject:
We at Grand Wealth Management also stand ready to help families make well-educated choices about their higher education costs.