By: Tanna Yerger, Digital Media Coordinator for Stockman Bank and former Stockman Wealth Management employee
The financial planning process at Stockman Wealth Management is designed to address questions regarding planning for your future retirement, tax situations, estate issues, insurance coverage and even debt analysis.
One of the most frequently asked questions during the planning process is “how can I give my child their best chance at a successful future?” College or further education is essential to many families.
In fact, it is almost crucial to get a degree or certification in order to level the playing field for many career paths. In a 2017 study from the Bureau of Labor Statistics, the average unemployment rate for young adults with high school as their highest level of education was set at 5.3%.
This compared to 3.8% for those with some college education and 2.5% with at least a Bachelor’s degree speaks volumes about the importance of higher education beyond high school. With that said, college is expensive. Many students require assistance in some form or another. Saving for college does not feel like a pressing issue until high school graduation starts to become tangible.
There are several different paths that can be taken to alleviate the stress of saving for the future of your children. Financial planning helps to choose the right one for you.
Then, the sooner you begin saving, the less anxiety you will feel when graduation day finally arrives. Read on to discover the various college savings avenues to consider when determining your overall financial roadmap.
One college savings option is called a Uniform Transfers to Minors Act, or UTMA account. An UTMA is a type of custodial account that is used solely for the benefit of the child that has been named beneficiary. This means that anything contributed to the account is considered an irrevocable gift to the child, and withdrawals from the account must be made for their benefit. Once your child has reached the age of 21 the custodianship ceases and the child becomes the sole owner of the account.
One of the major benefits to an UTMA is that the proceeds of the account do not necessarily have to be used for higher education. Withdrawing from an UTMA account is relatively flexible. The only stipulation is that the proceeds be used for the benefit of the beneficiary. For example, the funds can be used to satisfy basic livings costs or purchasing a home. Funds can also be used for something less practical such as going on a trip or attending a concert.
UTMA accounts have a unique tax treatment that was substantially modified under the recently passed Tax Cuts and Jobs Act. We strongly recommend seeking the advice of a tax professional to ascertain the tax ramifications of your unique situation.
This type of account allows flexible investment options. The funds in an UTMA account can be invested in anything, including CDs, bonds, stocks, or mutual funds. An UTMA account is a flexible way to save for higher education.
529 College Savings Plan
Another college savings plan to take into consideration is a 529 College Savings Plan. This plan is designed in a way that can provide a tax advantage while saving for higher education. A 529 plan works similar to an IRA or 401K plan.
The account owner selects a specific 529 plan, dependent upon the state, and is given a prescribed list to choose how funds of the account are to be invested. Investment options are limited to a list of mutual funds provided.
Because the proceeds of a 529 plan are intended to be used for college, it is important to be prepared for the possibility that the beneficiary may not have an interest in attending college. For this reason there is an option to transfer the 529 plan to certain relatives of the existing beneficiary.
The 529 plan allows the owner to have full control of the account regardless of the age of the beneficiary. This means that the owner (typically a parent or guardian) determines when the withdrawals are made. 529 plans also have federal tax benefits. Although you are not able to deduct the contributions on your federal income taxes, the investment will grow tax-deferred.
Any distributions used to pay for college expenses are federally tax-free. The 529 plan also allows you to deduct up to $3,000 a year per tax payer on your Montana State Income taxes. This means that if two parents each contribute $3,000 to their child’s plan they are able to take a total deduction of $6,000 for their household.
On the other hand, if a single parent contributes $6,000 to their child’s fund they are only able to take a $3,000 deduction. A 529 College Savings Plan can be a tax efficient way to prepare for college.
Coverdell Education Savings Account
Coverdell Education Savings accounts are also an option for saving for a child’s educational future. This plan limits the total contribution per year to $2,000. Similar to the 529 plan, Coverdell contributions are not federally tax deductible.
The contributions do, however, continue to grow tax free until distribution. The Coverdell account proceeds must be used for the beneficiary’s education. Expenses can include tuition and necessary supplies.
A Coverdell account is the only option that can be used for private school tuition prior to college. One major stipulation for a Coverdell plan is annual household income.
If the parents of the beneficiary have an annual income above the designated threshold, they will not be eligible for this program.
Due to contribution limits, this is a longer-term option for college savings and is less frequently used than the UTMA or 529 options.
How to Choose?
College savings plans that fit properly into a financial plan are available in several forms as described in this article. The difficult part is determining which plan is right for your circumstances and gives your child the greatest level of support.
This is why the comprehensive financial planning services provided by Stockman Wealth Management create a complete view of your current financial situation as well as a roadmap to reach all future financial goals in a coordinated fashion.
One commonality exists among all the college savings plans, the sooner a plan is in place, the quicker money can begin to grow into a financial safety net for your child’s education.
Contact Stockman Wealth Management today to determine if a comprehensive financial plan to coordinate solutions to the many challenges of planning for education, retirement, taxable investments, taxes, estate issues, and even insurance will help you stay on the road to your brightest financial future.