Answers in College Planning

Another thing to factor into your decision...Many states allow for deductions against state income tax for contributions to their (state sponsored) 529 plan. Depending on your state and its income tax rate, this could add to the value of a 529 plan versus a taxable account.

Michael, Robert and Craig made some good points. Just to reiterate regarding the retitling of the account. The money in the account will legally become your son’s and he can use it for whatever purpose he so chooses. (This is why UGMAs are sometimes called Ferrari funds…..). I assume this isn’t the case in your situation. It is just a note for others who may be interested in your question and considering an UGMA.

On a related note regarding UGMA and college. In particular regarding applying for student financial aid, you may be aware of the EFC (expected family contribution) or the amount the family is expected to pay for a student's education. This is calculated based on a number of factors, including the student's assets and income, the families income and assets, the number of individuals in college and others item. (The FASFA is standard application for student aid and has you put in all this info. If you are unfamiliar with the student aid process, good sites include is finaid.org and savingforcollege.com). The point is: student resources are weighted more heavily against receiving student aid. The reasoning is, if the child has resources of their own, then the college financial aid dept expects them to use the assets toward college. Thus, if you are applying for student aid, consider how and when to use the UGMA account in order to maximize aid in subsequent years of school.

Another consideration to make is to transfer the funds in the UGMA to a 529 college savings account. There are some tax advantages to transferring the funds to a 529 and also there are benefits to help mitigate the student aid issue described above. To fulfill the UGMA trust, the 529 funds will eventualyl be under the control of the child when they reach the age of majority (18 in your case). However, because the funds in 529 are designated for college expenses, it can help prevent (but can’t stop) the funds from drifting to ‘other’ spending that may not involve higher education.

The whole student aid process can be quite involved. If you need help, I’d suggest you talk with a fee only financial planner in your area. A good place to find a fee only planner that charges by the hour is at NAPFA and Garrett Planning Network.

Michael,

An UGMA account is a Uniform Gift to Minor Account that provided the parent with control over the funds until the child reaches age 18. Then they can access the funds and spend the funds as the child wants, no parental controls. Yes when the securities are sold their would be tax consequences for your child which you should review the tax consequences with them and your tax advisor before selling any or all of the securities.

The key point here, this is a great opportunity for you the parent to teach your child about being an adult and their financial responsibilities surrounding needs and wants and etc!

Good luck.

The answer to this question is simple. Assuming that the college investment you are making is the same in amount and timing of investment, in a 529 account versus a personal account, the benefit of the 529 accounts "Tax free" status on all 529 account earnings is the key advantage. Thus, you will accumulate true long-term value over the future years through the annual tax savings feature so you will have more funds available for college. thus, your personal account returns have to exceed the and 529 account returns by the incremental tax rate you will be paying on the earned income. thus, you will have to take a greater market risk when investing. Which is obviously not the best idea with future college needs.

good luck.

The simplest way to look at it is – Taxable (capital gain & dividends) as you go along, or tax free as long as it is used for education.

Therefore, to calculate the equivalent total return of a taxable account use the 529 return and add to it your tax bracket.

All the answers are great but beware of losing the forrest for the trees. The important issue is investing enough and in the right strategy to have enough to meet your goals. Just make sure that you dont let the registration decision hold up implementation of your plan and regular investing.

Another consideration is whether your state allows a state tax deduction for contributions. Consider two scenarios: 1) If your state allows deduction and your accounts are currently held with home state, be aware the state may reclaim past deduction (read plan docs) 2) If your state allows deduction and your accounts are held in different state, consider transferring over enough each year to maximize your state tax deduction, unless the fees and/or investment choices outweigh the state tax deduction benefit

I favor holding the assets in the parent's name in a 529 savings plan. This has multiple advantages: 1) retain control of assets after child turns 18 (in case they don't want to use for school) 2) parental assets counted at lower % toward expected family contribution in financial aid calcs 3) 529 plans grow tax free and withdrawals tax-free if used for qualified educational expenses negating any 'kiddie tax' motivations 4) your state may allow state tax deduction up to certain contribution amounts 5) REGARDLESS OF VEHICLE USED, BE AWARE OF SHORTER TIME HORIZON AND ADJUST INVESTMENTS ACCORDINGLY AS YOUR BABY APPROACHES LAUNCH DATE

Absolutely! You have the right to appeal and discuss the findings with the financial aid officer. Your case may be strengthened by mitigating circumstances in your income or asset situation (change in job status since the base year income used for calculating your Expected Family Contribution, for example). Also, consider gaining leverage with the financial aid officer by leveraging off of any aid packages offered by a competing institution where you applied.

In my college financial planning practice, I come across this sort of question very often. Generally, funds held in the student's name are assessed at a greater rate than your funds. There's a bit of a loophole for 529 accounts owned by the parent with the child named as a beneficiary. (The legislation is technically silent on their treatment and need for disclosure). A better way to arrange this is to have the 529 account opened and owned by a relative naming the child as a beneficiary. There is no current requirement for listing assets of anyone who is not a parent of the child applying for aid. (Think of the grandparents here. Create a gift that can keep on giving).

Philip, I agree with Donald. There is room to negotiate with the Financial Aid Officer at School 1. As noted by Donald, be prepared to discuss the other aid packages. While the school obviously can decline to adjust its standing package, asking the school to do better can and does work.

Philip, the answer is YES they certainly do reconsider. Some amount of aid is kept in reserve to enhance offers for kids schools really want. Write a letter and follow up with a call to the financial aid office indicating that the school is your child's preferred choice but that other schools offered better packages. Provide specifics of the aid packages to the extent possible. Do this as soon as possible, before the reserve funds are exhausted. Good luck!

Amos, The system sees it this way. -The child is your dependent and therefore you are responsible for the childs financial obligations. - Whatever funds are in the students name will be consider available to support the cost incurred and then they look at your financial ability to pay for the cost of college. Financial aid looks at the childs assets and the parents financial ability to pay and then decides how much they will supplement you. However, you can stop claiming her/he as a dependent a year before you apply for aid and that will increase the probability of the child getting more aid because she will be viewed totaly on her/his own. Good luck, Dan

Hello Amos,

This is a really tough area and there are pros and cons to both arguments.

Education IRA's are tax free for education - but limit the amounts that you can put in quite a bit.

529 plans are also tax free for eduation - but are quite often laden with high fees which greatly reduce returns. Additionally 529 plans count heavily against the student on the FAFSA form (Free Application for Federal Student Aid) and are essentially expected to be spent down to fund college.

UTMA or UGMA accounts - accounts where you or another person are the custodian (trustee) for the account - but the assets are legally the childs - and then revert to the child's name upon reaching the age of majority - also count heavily against the student on the FAFSA form and will count as a asset available for funding college when it comes to determining financial aid.

Accounts held directly in the child's name also count heavily on the FAFSA. Oddly enough - so does the studen't income - which doesn't make a bit of sense to me because if a student earned money in an after-school job during high school, it is likely they would no longer have that job once they started college. However, student income counts heavily against the student when it comes to determining need-based financial aid.

The best way to know what counts and what doesn't - and what counts MORE and what counts LESS - is to check out the FAFSA itself. Here are links to websites where you can find the info you need. It is not easy - and the more information you have - the better armed you are:

www.FAFSA.gov - this is the Department of Education Website www.FAFSAOnline.com - this is a service of the Student Loan Network - you have to enter your information, but you can download a great comprehensive guide to filling out the FAFSA - what assets go on the FAFSA, and what does not.

I would also ask that you read the guide I uploaded to this site - it is a good place to start. It is called "Strategies for Funding College - and Not Just Saving For it." Here is the link to it:

http://www.brightscope.com/financial-planning/advice/guide/3193/Strategies-For-College-Funding-Not-Just-Saving-For-It/

Good luck with your college funding. It is a challenge. The more you know, the better off you'll be.

Jon Castle http://www.Wealthguards.com

There may be a few possible drawbacks; you'll have to make that determination. (1) At age 21, the child controls the funds, so it's possible the child could skip college and use the funds for other purposes - buy a car, etc. At any rate, they'll be out of your control; (2) financial aid could be jeopardized since the formulas used reduce aid availability substantially more for each dollar the child has in assets compared to the parent's assets. Also, (3) there may be some issues regarding the so-called 'kiddie tax' - you may want to visit with your CPA on that one.