How to save for your child’s future education
The 18-year clock starts ticking the moment your child is born.
A college degree, despite the rising cost of tuition, remains a major achievement in the modern economy. You are more likely to have a job and earn a decent salary the more education you receive.
Yet many aren’t preparing. Just 56 percent of parents are actively saving for their child’s education, according to Sallie Mae, and hold an average of only $18,135. That wouldn’t cover one year of tuition, fees, and room and board at an in-state public institution, according to College Board.
The outrageous price tag for higher education, coupled with a lack of parental savings and the economic benefit of actually going to college, has led to historic levels of student loans. Many graduates leave school with a yoke tied around their neck, pushing back their ability to buy a house and start a family.
UGMA and UTMA accounts
If your child doesn’t plan to attend college and therefore isn’t at risk of losing financial aid, UGMA and UTMA custodial accounts offer standard tax breaks for children under 18.
UGMA stands for the Uniform Gift to Minors Act. UTMA stands for Uniform Transfer to Minors Act.
In these accounts, the first $1,000 in gains is tax-free, the second $1,000 is taxed at the child’s income tax rate and the remainder is taxed at the parent’s income tax rate, according to the IRS. Plus, there are no restrictions on how the funds may be used as long as they directly benefit the child.
What are the disadvantages?
The downside of UGMA and UTMA accounts is that parents have less control over how the child eventually spends the money, says Michael Kay, CFP professional and president of Financial Life Focus, a financial planning firm in Livingston, New Jersey.
“If money is in a UTMA or a UGMA account, it becomes (the beneficiary’s) at the age of majority, which is 18 to 21, depending on the state,” he says. “There’s no legal way to prevent the child from using money that was intended for college or a house to go to Europe.”
That may be why these accounts are unpopular. Parents have less than $200 saved here, or about as much as they have in Bitcoin.