Financial planning is a process that should begin long before an individual gets married and has children, but it is one that can be initiated at any life stage. There is no such thing as too late when it comes to considering the future. For parents preparing for their child’s educational futures, the earlier the start, the better. There are several options for setting children up for a successful future, and the right choice depends on the family’s income and circumstances, as well as plans and goals.
The most common path families follow to begin their financial planning is to set up a savings account for their young child. While this may be an adequate start for stashing away a few thousand in the early, lean years of marriage and raising children, it may not be the most efficient choice. Depending upon the family’s resources and income level, having assets in the child’s name may actually hurt his or her chance at getting financial aid and important tax breaks when the time comes to acquire the money needed for college.
Like a traditional savings account, a UTMA or UGMA, which are “Uniform Transfer to Minors Act,” and “Uniform Gift to Minors Act” respectively, put assets into the child’s name. The disadvantage is that these accounts may have an impact upon future asset assessments used to determine eligibility for scholarships or financial aid. The advantage to these types of accounts is that the money is earmarked for the child’s use when they come of age.
Specific Use Savings Options
Some financial planning tools are geared for a specific use. Products like a Roth IRA, which can be set up when the child is old enough to earn his or her own income, are long-term savings plans that allow for money to be withdrawn in certain circumstances or for specific expenses, like college. Other tools, like 529 plans, are set up with tax breaks and other incentives and are specifically tailored to cover educational expenses.
Whether a family begins thinking about financial planning early on, or it’s a topic that comes up when the children start school, it’s never too late to begin preparing for the future. A qualified advisor can help families navigate the complexities of saving and help ensure students have the best possible foundation for their educational future.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 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. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.