by Amy Shepard, CFP, RMA
What are some considerations when saving for your children’s or grandchildren’s future?
Like most financial considerations, the first question to ask yourself is “what is the goal?”. For some, the answer might be to save for college. For others, the answer might be to simply save for future expenses – maybe to help buy a car, a first home, or maybe to fund a year of travel or study abroad after high school.
What types of accounts can be used to save for children or grandchildren?
The most common choices are:
529 Plan: This account is specific for the goal of saving for college. An adult, typically a parent, is the owner of the account and assigns a beneficiary – typically a child. The contribution limits for this type of account are quite high and many states offer tax incentives for those who contribute. This account is also very flexible – you can change the beneficiary at any time to a qualifying relative. For example, if you open a 529 for your oldest child and they don’t go to college, you can change the beneficiary to another child instead. Parent-owned 529 plans have minimal impact on financial aid eligibility but when the owner is someone else, say a grandparent, there is a bigger impact on financial aid eligibility. If money is not used for qualified education expenses, there is a 10% penalty incurred.
UGMA/UTMA: Universal Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) are two similar types of accounts that technically belong to a minor child. These accounts are not specific to college savings – the assets can be used for any purpose. A custodian, typically a parent or grandparent, manages the account until the minor reaches the age of majority which is between 18-21 depending on the state. At that time, the child has full access to the account and can use the money however they want. If a child does go to college, UGMA and UTMA assets can have a fairly big impact on financial aid eligibility as they are seen as an asset of the child.
Savings Account: Many people chose to open a savings account at a bank – it can be opened in an adult’s name or as a children’s savings account. A savings account can only hold cash and with interest rates as low as they are right now, this is not a great option if you are saving for many years in the future as you will earn a very low interest rate and not have any opportunity for substantial growth. This could be an option if you are looking for a very safe place to hold cash for a short period of time – say 5 years or less.
General Brokerage account: Another option is to use a general brokerage account to save for a child or grandchildren. You can open an account in your own name with the intention of allowing the child to use the money at some point. This provides maximum flexibility – if the child does go to college, you can use these funds to help pay for it although, you won’t get any tax breaks. If the child doesn’t go to college, you can use the funds to pay for virtually anything. If the child is making poor decisions or not responsible with money, they have no legal claim to this account so you could decide not to give them any money at all.
When choosing to save money for a child or grandchild, first ask yourself what you are wanting to accomplish with the money. If you are set on saving for college, a 529 is likely the best choice. But if you are looking for something more flexible, a brokerage account may be a better option.
About the author: Amy Shepard, CFP, RMA
Amy Shepard is a Financial Planner at Sensible Money. She has a BS in Accounting, an MBA, is a CERTIFIED FINANCIAL PLANNER™ professional, Retirement Management Advisor®, and a Behavioral Financial Advisor™. She enjoys taking on challenges and solving problems while still maintaining positivity and excitement.