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Financial Matters for Parents
How to Start Planning for Your Child's Future
By Jean H. Manrique
Once parents have more to invest, Nohr recommends looking into a section 529 plan (also known as Qualified State Tuition Programs) or a Universal Gift to Minor Account (UGMA). "These 529 plans let you invest larger sums of money than other education savings programs with the advantages of tax-deferred earnings growth and reduced taxes on withdrawals," Knoll says.
A section 529 plan allows you contribute up to $10,000 per year for each beneficiary. However, as much as $50,000 for each beneficiary may be contributed in one year ($100,000 for married couples) without paying federal gift tax, provided that no more contributions are made to that beneficiary over the next five-year period. Once the total amount for a single beneficiary totals $246,000, no more can be contributed. The earnings, however, can continue to grow.
The UGMA (similar to the Universal Transfer to Minors Account – UTMA) allows a minor to own mutual funds or stocks, or can be used as a place to accumulate gift money given to the child. Such an account may not be the best choice for college savings, however, according to Nohr. If the account is registered in the child's name, the money in the UGMA may work against the child being able to qualify for financial aid.
If Grandma and Grandpa want to keep the money out of that crazy son-in-law's hands, though, the advantage of a UGMA registered in the child's name is that it is irrevocable – it can't be taken out except by the child when he reaches majority age. On the other hand, when Junior turns 18 or 21, he may decide to use the account for party money, Nohr says.
