My little brother and SIL just made me an auntie for the first time! Husband and I are pretty sure we're not having kids, and our other brothers have both been fixed so any future nieces & nephews will be pretty limited.
We'd like to set up some sort of college/trust/thing for our nephew and intend to do the same for any other nieces/nephews. Except were clueless about what the best option would be.
The idea of money into an account that's limited to college doesn't appeal (what if he doesn't go a traditional route? What if our country gets around to sorting out our education system? etc). Suggestions?
ETA: my nephew lives in Iowa, and we're cool with us or my brother & SIL controlling the account
I set up UTMA for my kids. I think the minimum was $1,000 and it is invested in stocks. Once the money is there, no one can take it out except the child when they come of age. It is no longer my money. If the account has enough earnings, over $900/year, the child might have to file a tax return. But I did not want to open a 529 either. Technically the money in a UTMA belongs to the kid and is an asset if they apply for FASFA, but mine don’t have enough that I was concerned
We set up a 529 for our kids. It can be used for typical college or trade schools. Also the money can be withdrawn and the penalty is on my the gain, which is also then taxed. The reason we are comfortable with a 529 is that chances are they will go to some type of schooling that qualifies. Also, if the money was in stock or another type of investment it would also be taxed upon withdrawal. So there doesn’t seem to be much additional risk to the 529 (other than the penalty on the growth of not used for school) and a huge potential upside (tax free growth).
If the child gets a scholarship, that amount can be withdrawn penalty and tax free. If the country figures it out we still aren’t behind as they would likely treat it as a scholarship so they wouldn’t penalize you.....and I don’t see that happening.
Also we are expecting zero financial aid due to our incomes so I wasn’t worried about fasfa reporting.
When I was googling a little last night, it sounds like we can set up the 529 in whatever state we want -- we're not limited to OR (where we're at) or IA (where he's at) so we can pick whichever we think has the best investment options. Does that sound right?
I don't want to mess up any possible financial aid, so it's good to know the UTMA can impact that. We'll definitely talk to my brother & SIL before we do anything so we don't totally throw them.
First that’s awesome you’re doing this for your nephew, what a gift! We are in Iowa and use the state’s 529 plan bc it’s supposedly one of the better ones (but maybe the advantages are only for residents?) We were comfortable with 529 bc like others have said, I suspect my girls will go to some form of further education/training and if they have a scholarship they can use the money for other things. Also it can freely transfer between the 2 if needed and also could pass to future grandchildren if that were to be most useful. In fact that is kind of our intent. We are using it as a sort of educational trust for future family members. We will continue to invest it in the more aggressive long term options knowing we are fortunate enough to be able to cash flow their education when the time comes. So hopefully it will continue to grow tax free over the years for as long as possible and be tapped into by future issue when needed.
With my oldest niece headed to college, I spoke with our financial advisor about ways to help her out. He convinced me to make sure that our retirement accounts were at healthy levels and being fully funded before setting aside money for her as we can't get loans to retire and she can for school. I was/am comfortable with where we are at for retirement, but he had a great suggestion of paying for her books and/or laptop when she starts out. It worked out really well for us and we plan to do that for the rest of our nieces and nephews.
I remember always being so stressed when I had to buy my books, so even though it seems small in comparison to tuition, I'm hopeful it will still be appreciated.
I think a 529 would be perfect. You don't have to set it up in your home state (but check if you can deduct your contributions on your state tax return). You are also allowed to withdraw the contributions (not earnings) without penalty.
Each of our kids has a target date fund in our taxable investment account. I like that we have control over when and how it can be used, but dislike the tax implications. We did not want a 529 for the reasons you mentioned.
Our retirement is handled, so I'm not worry out hurting our plan. I was also going to talk to my cousin who handles our backdoor Roths -- he recently had his second kid so I'm certain it's on his mind. Books and laptops are definitely a good idea, but technology is changing so much that I wonder what it'll be like in 18 years. So I guess now we need to decide if we want to do a larger one time gift and add on occasion as we feel like or can do, or if we want to do something on a more regular basis. I really appreciate all of your ideas!
If you do want to help, I’d put it in a tax free investment now. $100 invested now for books could easily be $400 in 18 years. The growth is really where the upside is now when the kids are so young.
We opened a Vanguard 529 for DS- the upside of tax free gains if he goes to any sort of post secondary school was just too great to pass up since lots of trade schools and such qualify as well.
While I know you’re not expecting more nieces/nephews, the 529 beneficiary can be changed to other family members (including aunts and uncles, so theoretically even back to yourself, though you’re stuck with the 10% penalty on gains if you don’t use it for school).
Close friends of ours buy DS a share of stock each Christmas to build him his own little portfolio, which is probably a more fun though much less tax efficient option. They’d previously given checks to other parents who never opened their kid the 529 it was intended for and so started doing this instead. Both will show up on his Fafsa but I don’t see him getting anything with our income level regardless of savings.
we used our states 529 for the tax deduction I'm not sure if you still can deduct if it is not your dependent
I hadn't thought about that. I'll check into it and see if it matters to husband or not. It doesn't to me because this is a gift, but it's still good to check.