College Savings--What if they don't go?

[dcfromva]

I think using a Roth for college expenses is a pretty clever idea for some folks--especially in the case where the child may be on the fence post about whether they plan to go to college and where the parents have other retirement savings and only plan to use the Roth as "frosting on the cake" and would be fine without it.
The only hesitation I could think of is that one of the strengths of a Roth is the longer you hold the account (and assuming you are making a good rate of return), the more you will realize tax savings over time. Typically, college money is needed in 18-22 years after the child is born vrs retirement money which could be held for 40 years or more. The amount you can contribute to the Roth is finite--once you pass up the deadline for making a contribution, you can't go back. Thus, you could be using up a pretty powerful hedge against higher taxes on retirement money held in the future if you use up your Roth account to fund college.
(But if your child doesn't use the 529 money for a qualified expense, paying taxes plus a 10% penalty on the earnings on the 529 plan would not be any fun, either.... )

-DC

 

[Lisa loves Pooh]

This is not true. 529 savings program funds can be used to pay qualifying expenses at any accredited college or university in the country and even some foreign schools. There is no penalty for doing this. In fact, this is the whole point of 529 programs.

Prepaid tuition plans are different. You can transfer the funds to another state but you may not get full value for them.

In Florida--you can transfer whatever they would have paid for instate tuition to an out of state school. We would be responsible for the cost difference of course.

 

[imsayin]

College Savings--What if they don't go?

Oh, they're going!!

My parents didn't care if we went to college or not. They just told us to either work or go to school after high school, just figure it out. My kids are already being brainwashed that college is their only option, so they better have a good plan if it isn't college. (I am fully aware that college isn't for everyone, but it is for my kids.)

My dream is that I have the overfunded 529 accounts due to scholarships.

 

[disneymom3]

Thank you for all of the helpful information Good to know that it doesn't have to be a traditional college to qualify. Sounds like putting a portion of the savings in a 529 and a portion in some other investment options will be the way to go.

 

[Braque]

DisneySteve - I don't find the Roth limits funny - I find the $4K limit difficult to achieve! That's whats funny - that it is considered ONLY $4K by some. So, it wouldn't matter much to us if the gov raised the limits to 10K.

ceiligh1 - I want to hear more about your high yeild account you can take out for your son that is not college specific and has no penalties for alternate use. Please post again!

 

[crisi]

If you want total flexibility and total control - I think you pretty much have to forgo any tax advantages and just invest in mutual funds that meet your risk tolerance and timeline for potential withdrawals. This is what we are doing.

Pretty much. There are other shelters that can be used. Municipal bonds are a good shelter - however, they tend to have lower interest rates to compensate for the lack of federal tax. Treasury bonds (but they are no longer tax free for education if you make over something around $80k). I believe disbursements from for education aren't subject to early withdrawl penalties, but I'm not sure. My husband's company offers a deferred compensation account - basically, they tuck the money away for you before you pay taxes on it, where it grows tax free - then you actually receive the income when you leave the company or retire - but they will grant disbursements for education without penalty (you do need to pay income tax) - that's our education savings fund, with the money left over for retirement (we also both have 401ks and IRAs). But those are fairly rare and usually only offered to fairly highly paid people.

 

[ceiligh1]

My DH doesn’t remember the term exactly either. I think it was a uniform gift to minor account. It is opened under the parents control for the benefit of the minor, be it for education or for another reason. My DH seems to remember the word trust maybe a minors trust but we are not sure. We have recently been working on wills so all the legal terms are swimming around in our heads. Sorry to get your hopes up, I really thought that he would remember what it was. So much for being each others extended memory bank.
When I look up both online I see that they are treated as an asset of the child (if held in the child’s name) so need based aid would be affected. However, these types of plans would allow a child who is not going to college to benefit from the money saved. For instance, if your child was able to go on a trip to Africa with his school you could take money out to pay for it or after graduation from high school they could start a business. The balance does revert to the children when they reach 21 so you lose control at that time.
Here is some links to the info I was able to find.
http://finaid.org/savings/2503ctrust.phtml
http://finaid.org/savings/ugma.phtml

I hope this helps. As I said before we have a 529 for our son. But since my DH has a step brother that never went to college (or grad HS for that matter) we are looking into other options just in case.

 

[disneysteve]

I think it was a uniform gift to minor account.

Just keep in mind that with a UGMA account, the money belongs to the child. The parent in custodian until the kid turns 18 and then the kid can do whatever he wants with the money. So you may intend it for college and he may decide to blow it on a new car.

This site describes these accounts and shows whose assets the money is considered as for financial aid purposes:
http://finaid.org/savings/ugma.phtml

 

[dcfromva]

I think it was a uniform gift to minor account. It is opened under the parents control for the benefit of the minor, be it for education or for another reason. As I said before we have a 529 for our son. But since my DH has a step brother that never went to college (or grad HS for that matter) we are looking into other options just in case.

ceiligh1,
That makes perfect sense. Actually, a UGTMA is very easy for anyone to set up. You could even pick your favorite stock or stock fund and set it up as a UGTMA for your child, if you wanted.
Truth be told, it makes sense to have some funds which have not been earmarked for any purpose even for going to college. There are going to be college expenses which are not considered qualifying expenses using the 529 plans. An example: the school where my DS will be attending this fall requires a child to have a laptop if they are going to have a computer, but does not make having a computer required. I have to check on this some more, but I believe the funds for DS's laptop can not come from his 529 plan. Another example would be transportation costs to/from school.
It is very hard to predict where your child is going to go to college. If you plan to save for a private college in a 529 plan and your child elects to go to a public school, you could end up with a lot of money left over. It could be this is no problem at all. Your child could use the money to go to grad school or you could transfer it over to another child, but if your intention is to give the leftover money to the child anyway (for any purpose) a UGTMA account has a lot of advantages. One of the biggest benefits is that after the child gets beyond the kiddie tax years (above age 14), the dividends and capital gains are taxed at the child's rate. This without impacting the parents' Ajusted Gross Income and overall taxes. (Under age 14, if the gains/dividends are above $1600 (this amount goes up from time to time), they are taxed at the parents' rate.)

As you pointed out, there are pitfalls to transferring money over to your child at such an early age. In some states, the child gets control of the money at age 18. This could cause some problems if your vision is for your child to save the money and use it for an emergency fund or put it with more savings so it could be invested it in property someday, but your child thinks it would be swell to use it to go to Daytona Beach for Spring Break (and treat all of his/her friends).... (There are some ways to mitigate this risk--such as keeping the money in an asset that is not easy to liquidate. But, this could prove to just be a speed bump to the really determined.)

-DC

 

[SWVA BGSU Fan]

I'll have to add my $.01 into this debate.

Generally speaking, the 529 plan is probably the best overall way to save for college. The beneficiary has 30 years after turning 18 to use the funds if I'm not mistaken. Changing beneficiaries to other family members is easy and you can even name yourself as beneficiary if needed. Many states offer a state income tax deduction up to certain limits for contributions. Contribution limits are very generous. The worst case scenario is that you withdraw funds for unqualified use. You pay 10% plus tax on the earnings....the principal was made with after tax dollars. 529 plan assets are treated as the owners (usually parent) assets which are much more favorable for financial aid than UGTMAs or even the Coverdell IRA which are considered the student's assets.

I strongly disagree with using a Roth to fund college education. The primary reason is that there is no way you can ever go back and make up (add back) money that was taken out since there is no loan provision. You can continue to make yearly contributions though. The tax free earnings over a long period could be substantial and using it prior to retirement would cut into your nest egg potential.