My husband’s coworker is interested in saving some money for her children. She asked for help in determining how the money should be invested to best serve their family. I am not a financial planner. I’m just a stay at home mom with a business background and a love of personal finance.
Having explained this and receiving her affirmation, I asked her several questions. The intent of these queries was to flesh out an appropriate college savings vehicle from among all of the available options.
College Savings Options
Here are my questions and her responses, as conveyed by my husband. Are you deliberating how to save for your child’s future? I hope this discussion is helpful.
7 Questions & the Reasoning Behind Them
1. Is your child headed to traditional college or university?
*Reasoning: tax-advantaged accounts like a 529 plan can only be used for tuition, fees, and certain other qualified expenses.
2. Do you expect your child to choose a career with on the job or journeyman training rather than college?
*Reasoning: same as above. If a child doesn’t utilize the funds in a 529 another beneficiary within the family can be named. Otherwise, the money would need to be withdrawn under penalty.
3. Do you expect scholarships to cover a large portion of schooling costs?
*Reasoning: If scholarships will cover a majority of the schooling costs the same situation as above may be encountered.
4. Will your children be attending an expensive University (aren’t they all!)?
*Reasoning: The more expensive the expected University, the more a student would likely benefit from a tax-advantaged account. The child will be spending much more overall and are less likely to make up the difference with scholarships.
5. Would you like the flexibility of having investments for your child that can be used for purposes other than educational spending?
*Reasoning: It makes sense to use an UTMA if you don’t expect your child to follow the traditional “four years at college and then find a career” model. Many good jobs require on the job training, the costs of which aren’t qualified for reimbursement under an ESA or 529.
6. Do you expect your child to be able to manage these investments wisely when they come of age, or would you prefer to retain full ownership of the assets?
*Reasoning: Assets in a custodial account can be used (for good or evil) when the child reaches the age of majority.
7. How many years until the investments will be utilized; what age are your children?
12 & 14
*Reasoning: the longer that an investment can marinate, generally the more aggressive the vehicle can be. Reversely, it would be a shame to dump a high school senior’s savings into a high-risk investment and then see it tumble (as we’d expect in the short term with a more volatile choice).
My Response: Use Investments in the Parent’s Name
These responses lead me to recommend either a custodial account (if the parents don’t feel strongly about their preference to retain ownership), or investing in growth mutual funds in their own name while earmarking them for their children. With the second option they lose the benefit of taxable income from the asset being taxed at the child’s rate rather than at the parent’s higher rate.
This is acceptable knowing that the child’s expenses are unlikely to be qualified for disbursement if they were to use tax-free accounts. They’ll be saving to use these investments for any purpose, not just education. A new home or business start-up are two examples of where this money could be spent.
Knowing the husband’s wariness to hand over the assets when the children reach the age of majority (21 in our state) they’ll likely choose to retain the investments under their own names.
I also recommend that they read Dave Ramsey’s The Total Money Makeover. The Total Money Makeover contains extremely helpful steps for knocking out debt and building wealth.
Are you still trying to figure our how to save for your child? I’ve got a great tip if you’re looking to save for your children’s future but unsure of how to start. Ready? Here’s my advice: Just do it! Seriously, just do it!
Start a separate savings account and begin automatically putting some of your paycheck into it each month. In no time you’ll have a great starter fund for your children and then you can come back and determine exactly where you want to invest. Your children will thank you. Just do it!
Have you started saving for your children’s future?