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Financial Planning for Your Child's Future

by: Jackie Waters
published: April, 07th 2017

Financial Planning for Your Child’s Future

Parents want their children to be financially secure for the future, and that means estate planning, life insurance, and many other facets of preparation. It also generally entails ensuring their children will not graduate college with a heavy amount of student loan debt. With an average four-year college costing students nearly $38,000 to attend in 2015, it is important to not only consider how to save for college, but also where to save.

Photo: Pixabay

Where to Save 

According to Sallie Mae, the majority (61 percent) of parents utilize a general savings account for storing their college savings. Checking accounts constitute 38 percent, and 529 college savings plans account for 37 percent. So which option is best?

Although most parents opt to save money in a general savings or checking account, Beth Pinsker of Reuters News warns that this is not the best option. First, you are probably earning one percent or less in interest – lower than a 529 plan. Also, when you save money this way, you may be tempted to spend the money if an unexpected emergency pops up. 

Some parents choose an UGMA/UTMA account for savings, but these generally hurt financial aid eligibility substantially more than 529 plans because colleges view UGMA/UTMA accounts as a child's asset, but view 529 plans as a parent's asset. The NY Daily News describes an UGMA/UTMA account as “a custodial account set up under the rules of a state's Uniform Gift to Minors Act or Uniform Transfer to Minors Act.” You save money in an account for your child and act as a custodian for the account until your child is older, usually age 18 or 21, and then he or she can access and use the money however he or she wishes. On the flipside, a 529 plan allows you to retain control of the account.

With an UGMA/UTMA account, the first $1,000 in the account is tax-free, and the next $1,000 is taxed at the child's rate, which is almost always lower than the parent's rate. Since any investment over $2,000 a year is usually taxed at the parent's tax rate, most parents do not invest more than this amount. A 529 plan is tax-free, and many states offer a tax incentive if you contribute to a 529 plan. There are many other incentives for using a 529 plan, and most financial experts agree that a 529 plan is the best option for saving money for college.

529 Plans Explained 

The U.S. Securities and Exchange Commission states, “A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs” and is sponsored by your state. There are two types of 529 plans, and all states sponsor at least one type. The first option is a prepaid tuition plan, which allows you to purchase units or credits for future tuition for your child. The second option is a college savings plan, which authorizes you to create an account for your child for the purpose of paying for college tuition and expenses. As the account holder, you can usually choose from several investment options, and the college savings plan invests on your behalf with contribution limits in excess of $200,000.

Additional Costs to Consider

You have decided where to store your savings for your child’s future college tuition, but do not forget additional costs that incur when attending college. Your child will need to pay for room and board, and even if your child commutes to college from home, you will need to ensure your child has reliable transportation and money for gas. Although students can utilize the library for computer usage, having a personal laptop will probably make life easier on your child. Your child will also need money for food, books, and other materials.

Where to Find More Information

  • College Savings Plan Network, created by the National Association of State Treasurers, is a great place to start
  • Check the Financial Industry Regulatory Authority’s (FINRA) site as well
  • Speaking with a financial advisor or broker on topics ranging from saving for college to adding your child as a beneficiary to all of your financial accounts is a good idea, and you can check a broker through FINRA’s BrokerCheck website.  


This material was prepared by Jackie Waters, www.hyper-tidy.com

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. No strategy assures success or protects against loss. Investing involves risk including loss of principal. Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.




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