How to evaluate college savings programs: Part 3
It seems like no matter how early Americans start saving for college, educational debt is hard to escape after graduation.
The Federal Bank of New York recently reported that Americans 60 and older still are paying on $36 billion of student debt. This debt is made up of previous school loans that are still being paid, new loans taken out to return to school in hopes of landing a better job or acting as cosigners for other family members such as grandkids.
Over the previous weeks, my blog has been taking a close look at the different ways parents can begin to save for their children's college. Having already discussed the Coverdell ESA, let’s look at the Uniform Trust for Minors Act, or UTMA.
An UTMA allows anyone to make a contribution into an account for a designated beneficiary. A trustee must be assigned to watch over the account until the minor reaches the age of majority in their state. During the contribution phase, the account grows tax free for the first $950 of unearned investment income and then at the child’s tax rate from $951 to $1,900. Beyond $1,900 the income is taxed at the parents’ or child's rate, whichever is greater.
In addition to helping plan for your children’s or grandchildren’s education, the UTMA can be a valuable tax-planning strategy as it lowers the taxable value of your estate. The laws allow up to $13,000 per donor or $26,000 per donor couple.
When it is time to pay for college, the money will be taken out on a capital gains basis, which is currently 15 percent for people in the 25 percent tax bracket or higher, or 10 percent for those below the 15 percent bracket.
Due to the nature of the account, when it is time to apply for financial aid this asset now belongs to the student and might hurt their financial aid application. As a result, some parents will leave the UTMA in their own name, since the parents’ assets are discounted compared with the child's. Then as custodians they may, as permitted by law, use UTMA assets for the benefit of the child prior to completing financial aid forms. Hence parents can receive the tax benefit and still avoid losing financial aid.
A potential downside to UTMA is that upon reaching the age of majority in their state, beneficiaries now have total control over their accounts and can use the money as they see fit. If college is not on their plans, they could use it for any noneducational use, like a new car.
The stipulations of UTMAs and their impact on financial aid can be complicated. As with all our other discussions, it is best to sit with a qualified planner to help you put these plans into place. Your best strategy might be to implement more than one of the savings methods we’ve been discussing.
Joe Wirbick is president of Lancaster financial services firm Sequinox and specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.
Tax advice provided for informational purposes only. Tax returns should be completed in conjunction with a qualified tax professional. Sequinox Financial and JWC/JRAG do not offer tax advice and are not affiliated. Mr. Wirbick is an Investment Advisor Representative offering advisory services through Jonathan Roberts Advisory Group, Inc. and securities through J.W. Cole Financial, Inc. Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JRAG.