- Our families didn’t pay for my and my husband’s college.
- We have five kids, ages 13 to 4, and we know we can’t fully pay for their college.
- Instead of going with 529 plans, we went with UTMA custodial accounts instead; here’s why.
When my husband and I were growing up, our families told us early on that they would not be paying for us to go to college.
We fully understood. Neither of us has a wealthy background. Both our sets of parents married young and none of them completed degrees themselves.
With parents near retirement, a highly variable self-employment income, and five kids of our own, our memories of working our way through school are none too dimmed. Those degrees were hard-earned, and while our families supported us to the best of their abilities, the money part was mostly left up to us.
With a middle-class income, we are under no delusions that we’ll be able to pay for everyone’s schooling outright, yet our desire is to support our children, who are ages 4, 6, 8, 10, and 13, set themselves up for success.
When most families think of education savings, they picture a 529 plan. Instead, we chose custodial accounts under the Uniform Transfer to Minors Act, or UTMAs, for our kids.
A 529 savings plan allows you to save money for a beneficiary, your child, and use it to pay for education expenses. You can pay for tuition, but also boarding, and books. Some parents use it to pay for private school before their kids are off to college.
A UTMA custodial account is managed by the parents until the child is either 18 or 21, at which point they gain full control of the money. They can use it to pay for college or make big investments such as buying a car. The accounts can contain money, real estate, fine art, and even patents.
Here’s why we decided UTMA accounts were best for our family situation.
In a UTMA custodial account, money belongs to the child
It’s important for parents to understand that the funds in a UTMA account are legally considered the child’s property, Andy Esser, a financial advisor at investing firm Edward Jones, said.
On the plus side, this status “could provide some protection from the parent’s creditors,” Esser told Business Insider. This doesn’t rule out 529 plans, which can be set up with either a parent or a child as the legal owner; additionally, some states do offer creditor protection for 529 funds.
While you might hope to skip estate probate with a UTMA account, Esser notes that’s also not completely true. If the custodian dies, a new one must be appointed, and if the minor dies, the account typically becomes part of the minor’s estate.
UTMA accounts are flexible
While 529 plans must be used for education-related expenses, the options for UTMAs are much broader. The primary stipulation is that custodians cannot spend money on themselves; the money must be spent on something that directly benefits the child.
Benefits may include necessary support costs, such as healthcare, or they can be big-ticket items. With UTMAs, our kids could buy their first cars, study abroad, put down payments on their first apartments, or even get married.
That said, any investments that UTMA accounts make that result in income earned means that the income above $1,300 is taxable, and the child or guardian will be responsible for paying those.
UTMA accounts fit better with our parenting philosophy
We’re not aggressive savers, and having lived through a market crash, we don’t like having too much money tied up in traditional investments, either.
Recent suggestions that the American stock market is bubbling dangerously again haven’t assuaged our concerns. I wanted something reasonably safe that could grow over time and be used in many different applications, with no doubt as to which person each fund was intended for.
We’re not very hands-on with our custodial accounts, and we don’t plan to keep huge amounts of money in them, ever. They’re meant to supplement our children’s needs at some future date, not eliminate their responsibility to study, work, and build their own savings. If someday we find ourselves doing better financially than we are now, we’re more likely to help our children invest in something tangible, such as a vehicle or to help start a business.
Special needs can be accommodated
One of my children has dyslexia and dislikes traditional schooling. The flexibility of a UTMA account means that we can include all of our children equally without the expectation that everyone will choose to go to college.
That said, UTMAs do have a bigger impact than 529 on college financial aid eligibility.
UTMA accounts are affordable
After our youngest was born, I was determined to start some sort of savings for all of our kids, however small. In a tough quarter, they’ll each be getting the $25 monthly minimum, and in better seasons, I’ll put by whatever extra I can. If extended family members wish to contribute also, our brokerage accounts make it simple for them to do so.
Like 529 plans, UTMA account contributions are post-tax, meaning that income taxes have already been paid on the money being deposited. For moderate-income households like ours, however, where there is no intention to set aside tens of thousands of dollars per account, a UTMA account is simple to open and cheap to keep running.
We realize 529 plans would give us more direct control over our children’s spending, but sooner or later, they’re going to have to grow up. A UTMA account is just one of the tools we hope will help them do that.
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