University savings beyond 529, with the help of our partners at UNest
Let's say you had a baby today. Good, you. Second, maybe rest a bit and read this later? Third, start saving some money – according to the cost calculator at the Nonprofit College Board, four years of higher education will cost $ 222,466 in 18 years. And it's for state education in a public institution. If Junior goes out of state or to a private school, college can drive you as much as $ 438,000. Suffice it to say that for most of us, that's a significant part change.
That's why 529 higher education pension plans, created by the federal government in 1996 and adapted in recent years, are so important. They are a bit like 401,000 for education. All growth is tax deferred, which means you do not pay any tax on it while it is invested — and in some states, certain fees are deductible.
When it's time to send Junior to college, you can collect that money tax -Free, as long as you spend the money on a qualified expense, such as tuition, lodging, even computer equipment. (Note: Specifications vary by state, but nothing prevents you from using a fund run by a state other than the one where you live.) Thanks to an amendment to the 2017 tax law, you can also use a 529 for private elementary and secondary school expenses .
Sounds good, right? And for the most part, it is. That said, there are downsides. 529s have strict definitions of eligible expenses, so you can still cover expenses along the way. Then there is the unknown – everything from your child choosing not to go to college, to your child receiving a scholarship. (And hey, you never know – a recent proposal would make certain types of college education free for some families, in which case you may need to find out something else to do with all the money saved.) But hey, college is expensive, so Having a little extra savings is never a bad thing. So what if there was another way? It turns out that there is. It is called the Uniform Transfers to Minors Act (UTMA), a type of custody account that allows parents or other caregivers to pay costs for everything that is child-related, including education. We spoke with Ksenia Yudina, founder and CEO of UNest, a money app designed to help parents invest in their children's future, to understand more.
In this article:
What is a UTMA?
A UTMA is what is called a custodian account. In short, it is a way for parents to save money for their children, who then gain control of the account when they turn 18 or 21, depending on the state. It's a simple process – an adult creates the account, contributes to the account, manages the account and eventually transfers it to the recipient. You can think of a custodian account as a type of trust account.
Other adults can also contribute to the single gift account, and since donations are considered a gift, only donations in excess of $ 15,000 are subject to a gift tax. The custody account will also be subject to income tax and / or capital gains taxes similar to other investment income accounts.
If the transferor passes before the trustee is of age to receive the uniform transfer, the guardian must need to be reconsidered. Currently, a nominated guardian will take over responsibility for the UTMA transfer account, and they will be a successor because the minor is of legal age to receive the UTMA assets.
Speaking of taxes, the first $ 1,100 of annual income is tax-free, and the next $ 1,100 is taxed at the child's tax rate (which is usually lower and therefore beneficial to the contributing adult). Profits in addition to that are taxed according to the adult's tax rate – but again, they are profits, not subsidies. Finally, note that unlike a 529, which can only be funded through cash contributions, a UTMA account can be funded using a variety of methods, including stocks, bonds, mutual funds and cash. UTMA can also even contain art or property for a minor beneficiary. In terms of custody capacity, this offers greater flexibility for parents when making decisions about their property planning.
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How does it work?
You start by opening a UTMA account with a trusted financial services provider and naming a minor beneficiary. Each year, you can contribute up to $ 15,000 per individual (or $ 30,000 for a married couple). This money is handled by the personal representative or financial institution and can, as mentioned above, be invested in a variety of things. When the account's beneficiary turns 18 or 21 (again, it varies by state), the recipient can use the account for everything — tuition, room and pension, college savings, down payment on a house or car, even a wedding. In some situations, it may even make sense to roll in the money to a 529, which would reduce any effects on financial aid.
You can also consider a UNest service for your UTMA account. UNest is a registered investment adviser (RIA). The service costs $ 3 per month and you can create a UTMA account in minutes after downloading the UNest mobile app. From there, you can set up a monthly contribution – the minimum is $ 25.
The advantage of using UNest is that thanks to partnerships with Disney, Nike and Old Navy, you can also earn additional contributions by shopping or taking action with one of these partners – including Haven Life. All Haven Life customers are entitled to a free $ 25 contribution to their UNest account simply by signing up. And if for some reason you are not already a policyholder, you can get a quote with Haven Life and get a $ 5 grant. (UNest also has a referral program where you can earn grants to turn on friends for the service.)
What can it be used for?
"You can use the funds for everything that is child-related, whether it is swimming lessons, a first car or college," says Yudina. "Flexibility is key, especially when parents question how sustainable the cost of college is for their children." This flexibility is really a big part of UTMA's appeal. The reality is that college is expensive – but so is life. Creating a UTMA helps to provide coverage for tomorrow's financial challenge outside the education arena.
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What are some of the advantages and disadvantages of a UTMA versus a 529?
Again, it's about flexibility and what the minor's benefit will be used for. The government regulates what a 529 can be used for; a UTMA can be used on almost anything for the subordinate. The tax benefits also vary – in the end, it may be worth talking to an accountant at a financial institution to better understand the implications for you and your family of this important decision.
Which reminds us: In a way, it's not a choice at all, because nothing prevents you from having it both ways. "They are not mutually exclusive," says Yudina. "You can have both if your financial situation allows." Suffice it to say that whatever you choose – a 529, a UTMA or both – to create an account today for your child's future is better than doing nothing, whether their first grade is in the fall, fall of 2039 or later.  Default author main image "class =" avatar avatar-120 wp-user-avatar wp-user-avatar-120 photo avatar-default "/>
About Louis Wilson
Louis Wilson is a freelance writer whose work has appeared in a variety of publications, both online and in print. He often writes about travel, sports, popular culture, men's fashion and grooming and more. He lives in Austin, Texas, where he has developed an unbridled passion for breakfast tacos, with his wife and two children.
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Our Editorial Policy
Haven Life is a customer-centric life insurance company backed and owned by the Massachusetts Mutual Life Insurance Company (MassMutual). We believe that navigation decisions about life insurance, your personal finances and overall well-being can be refreshingly easy.
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