<p>UGMA can be either 18 or 21. I believe only some states offer the 21.</p>
<p>hoedown, I hear you on the need to plan for retirement concurrently w/college saving--that tension always concerned me...</p>
<p>1moremom---interesting---for my 3 year old, I just found a fantastic Montessori preschool that I want to send her too---it's pricey, but seems wonderful (& I need some supervision/educaction for her while I work, too). It's hard balancing that against the college fund for older child, though!</p>
<p>My recommendation is not to use Uniform Gifts to Minors Act (UGMA) accounts to save for your child's college education. (I won't be commenting on 529 plans in this post). This is especially the case if you are investing in the stock market in your own name as part of the college savings plan for your son/daughter. Why? First, as has been stated already, the UGMA money becomes theirs to do with it as they will when they turn 18 or 21. (You had a college education in mind; they may have a motorcycle or car in mind.) Second, the capital gains rates on stock/mutual fund investments have come down for everyone in recent years so that the tax savings versus the UGMA funds being taxed at the child's tax rates is relatively minor. In essence, the UGMA tax savings are minor versus the irrefutable fact that the UGMA money is theirs when they become adults at age 18 or 21). Finally, historically the Estimated Family Contribution (EFC) formulas have always had a higher annual contribution rate each year for a child's assets (i.e. UGMA money) versus the parent's assets.</p>
<p>We budgeted for UC - about $19,000 per year currently - and saved roughly half of that (times four years) for each of our three kids. I figure we'll be paying off the other half while and after they are in school. If they want to go somewhere more expensive than UC they'll have to figure out how to bridge the gap. Having three kids makes it a little tougher, because they're all different and yet you need to treat them all more or less equally. And after four years I have no plan.</p>
<p>We started when they were born. Fortunately we were older and had more to invest for them by that time. Recently we consulted a financial planner to make sure we were still on track. He assumed they'd be going to the state school and picked a number, but now we're targeting saving for private if that's the way the kids want to go. There'll probably be some belt tightening as retirement coincides with college years, but college is the number one priority for our $$ .</p>
<p>Gotta disagree with lonestardad about UGMAs. They are great ... for the right family.</p>
<p>First, the family needs to live in a state which allows the account to continue until 21. That way, the money will be all spent on college before the child is entitled to get his hands on it, thus eliminating the possibility that the child can spend it wastefully.</p>
<p>Second, it should be a fairly high net worth family. For such a family, the fact that the UGMA money affects EFC heavily is irrelevant, since the family won't be getting need-based aid in any event.</p>
<p>Third, the tax advantages are NOT minor. If the family invests for income, the UGMA structure can be the difference between a 38% tax rate on the parents' marginal investment income and the child's 15% rate (assuming the child isn't a rock star or kid actor with other income).</p>
<p>For me, I saved hundreds if not thousands on taxes with the UGMAs, and the custodial nature of the account kept me from invading it for my own purposes, which I might have done otherwise, being a weak-willed and selfish Baby Boomer.</p>
<p>I think the big issue with UTGAs is that they are considered the child's assets and dinged at the 35% (is that correct?) rate as opposed to 5% if they were the adults'. If you are not going to qualify for need based aid, the tax savings can be considerable. If you might qualify, you could find yourself suffering from "UTMA regret".
<a href="http://www.fairmark.com/custacct/regret1.htm%5B/url%5D">www.fairmark.com/custacct/regret1.htm</a></p>
<p>-"If you are not going to qualify for need based aid, the tax savings can be considerable."-</p>
<p>There ya go.</p>
<p>These debates about where to put Junior's money are fun. To reply to Roscoe's post about UGMA money, I caveated my comments regarding the superiority of keeping the money in the parent's name by stating that my comments applied if the college savings money was destined for stock market/mutual fund investments (not income investments). In the case of stock market investments due to the low capital gains rates, the tax savings are indeed minor for UGMA taxes paid by the child versus taxes paid by the parent for stock related investments intended for college savings. And no chance of Junior blowing the money on something else.</p>
<p>We have had at various times college dedicated moneys in joint accounts, Kiddie IRA (now coverdell), EE Savings Bonds, UTMA in stocks and MFs, and the 529. In fact we are now opening a 529 with the kid as the owner and the beneficiary, but will be only used as shortterm money parking from now to tuition payment at end of August. </p>
<p>Lonestar: The problem that I find with 529 is that, what happens if your portfolio in the 529 loses $? 529 works OK, but not great, in a rising market, but in a prolonged down market you are kinda SOL, especially when you have limited investment companies/funds/choices.</p>
<p>In an UTMA/UGMA you can take tax loses or to offset gains. And when the investment makes $, the tax bite is small if any to the kid. I'd rather have the kid be paying taxes on a bunch of $$$, than to pay no taxes on very little. The UTMA also allows just about any investment.</p>
<p>I'm fascinated (yet overwhelmed!) by all this great financial info! (EE savings bonds, UTMA, MFs---sadly, I don't even know these acronyms!)</p>
<p>Thanks to all who shared their knowledge!</p>
<p>A last (basic) question---for two parents who are, um, not savvy in the financial/investment world---is throwing all our extra money in a 529 (more for 14 yr old, lesser for 3 yr old) a reasonable plan? </p>
<p>We basically went to our Morgan Stanley advisor and said---set up something for us that we don't have to think about, money just gets automatically deducted and put in it. He gave us a projection about how much we should do a month (we've fallen far short of that, recently).</p>
<p>Neither hub nor I follow stocks/investment strategies (though I could learn...) Don't want to be willfully uninformed, but if a plan involves constant stock monitoring and 'tweaking', --- just anticipate, realistically, that it might not be the best fit for our family. </p>
<p>But, I could do it, if it would have a benefit. We don't have a lot of extra savings to play with, although on paper we're in a decent bracket, salary-wise.</p>
<p>Thanks so much to the knowledgeable people here sharing their info!</p>
<p>Jolyne - When I read "Morgan Stanley Advisor", I grab for the wallet in my back pocket before it disappears with fees and commissions. If you have a few minutes, take a look at scottburns.com and browse through some articles from my favorite financial columnist. Scott Burns is an MIT graduate who writes down-to-earth personal financial advice for the Dallas Morning News, but whose articles are also syndicated nationally. He is an advocate for plain vanilla index funds and is the originator of the "couch potato portfolio" back in the 80's. The idea is that the "couch potato" puts his/her money in a combination of a broad market index fund (such as S&P 500 or Wilshire 5000) (such as 75%; 60%; 50% based on your risk (i.e. how much can I stand to lose) tolerance) and a broad-index bond fund and then forgets it. Once a year, the couch potato spends a few minutes literally "rebalancing" the index portfolio to the original 60/40; 75/25, etc. stock/bond ratio and then goes back to the couch. That's as complicated as it gets. The results over 5, 10, 20 or whatever time horizon you'd like to choose. The couch potato portfolio (and its minor variations) does better in market performance than 70 percent or more of actively managed funds over various time horizons. The management fees are rock bottom (at Vanguard around .2 percent annually of your portfolio's value versus 1.25 percent and higher at actively managed funds); turnover (i.e. buying/selling stocks and bonds is low so capital gains taxes are also low.</p>
<p>Index fund thoughts apply more to your three year old's college money than the 14 year old when you include stock market investments because there is more time for recovery in her college money portfolio if there is a substantial downturn in the market. However, for your 14 year old, do consider as PART (not all) of his college savings I-bonds from the U.S. Treasury as well. First, they are very conservative but keep you a step ahead of inflation. Two, they are tax deferred. Three (and most important), if you use the money for college a portion of the income taxes due when you cash them in are cancelled. The downside - not much, if you cash an I-bond in before 5 years you lose one quarter (3 months) of interest. I-bonds are another (get it and forget it) alternative that doesn't keep you up at nights worrying.</p>
<p>By the way, I have not commented on 529 plans because they came along well after I was down the road in saving for my kids. BUT, 529 plans can be excellent college investment alternatives. But as you sort through possible plans from states, also keep in mind the fund management company as well. Vanguard, T. Rowe Price, Fidelity, and TIAA-CREF (the huge teacher retirement financial advisors). Lowest management fees in general start with Vanguard and TIAA-CREF, T. Rowe Price, and Fidelity. All have excellent fund choices - both index and actively managed funds.</p>
<p>All of these fund companies also have regular savings plans as well that you can add to through automatic deductions from your checking account.</p>
<p>Watch your wallet, Morgan Stanley is coming in the back door.</p>
<p>Jane Bryant Quinn has a book called something like "Making the Most of Your Money" that offers fairly simple strategies for college saving (among other things), including recommendations for moving the money to less volatile accounts as matriculation dates get closer.</p>
<p>One option I haven't seen mentioned here regarding 529 plans is the new "Independent 529 Plan" that is operated on behalf of hundreds of private colleges, ranging from Stanford and MIT to Marist and Drexel. With this plan you prepay tuition at a discount from today's tuition rates. A financial person might say you are buying "tuition futures," and since tuition has been going up faster than inflation it's not a bad bet. The certificates can be used at any of the participating colleges, can be transferred to another child or relative, or redeemed if not used. I'm not associated with the Plan or anything, but it seems like a worthwhile deal if you think there's a good chance your child will attend one of the schools.</p>
<p>we started saving when the kids were young --can't overemphasize the importance of that for anyone who can - the amount we have available is not just what we were able to save, but the amount that savings was able to grow over that time - if only my kids had been ready for college before the last big market "correction" :-)</p>
<p>so anyway, we have had plenty of time to second guess ourselves over and over again as to what was the best way of putting aside the money. UGMA's seemed to make a lot of sense from a tax standpoint, then we learned how the UGMA money was treated for financial aide purposes, then we thought we probably wouldn 't get financial aid anyway, then we wondered if we might as our financial situation changed over time. when we first looked into 529's the investment options for our state were too restrictive for my liking, then i looked again years later and it seemed like a more attractive option. savings bonds seemed to offer way too little in return - now bonds purchased when my kids were little have higher returns locked in than we can find anywhere today.</p>
<p>i think the major thing is to realize is that this is a long term process and to keep an eye on things as your situation may change over time. you can start when your kid is little, but you can't make all the decisions then - you have to keep an eye on what is going on as investment opportunities and laws change and your personal financial situation changes.</p>
<p>other thing i want to throw out there just because i don't think i've seen it mentioned - there is something called independent 529 that some colleges participate in (<a href="http://www.independent529plan.org/%5B/url%5D">http://www.independent529plan.org/</a>)
which if you really think your kid will go to one of the participating colleges looks like it might be good - but less attractive if you think you child will end up elsewhere.</p>
<p>UGMAs are only for the right situation. Have known two acquaintances with UGMA experience. </p>
<p>In one case, when the kid was able to get to the money, he decided that he wanted to become an actor (didn't need college) and spent the money on a new truck. Not what Mom had planned, but what can you legally do? It's his money. </p>
<p>In the other case, for college financial aid reasons, the decision was made to spend the UGMA $$ during high school. The money was spent on a VERY expensive musical instrument. </p>
<p>We chose to give up the tax advantages to have complete control.</p>
<p>As for learning about financial matters, even if you have a financial advisor, you should know about these things--a lot of people have been led down the wrong path by advisors over the years. </p>
<p>And you don't have to be a genius--I would subscribe to Money Magazine for a year. In reading the mag for just one year, you can get a good lay of the land when it comes to financial matters--retirement, college, etc.</p>
<p>ellemenope - Excellent "real world" advice you gave on UGMA's and Junior spending money on a truck while Mom's quaint ideas about college go poof.
Also, I second your opinion regarding "let the buyer beware" aspect of some financial advisors' recommendations.</p>
<p>I too am a subscriber to the personal finance magazines such as Money, Kiplinger, and Smart Money and find they give good, practical advice on financial matters. However, my only caveat to a beginner investor regarding these magazines is that due to the journalistic need to always find something new and interesting to report, they will often highlight that particular month or quarter's investment stars while giving short shrift to boring, mundane index funds that deliver consistent returns over long periods of time.</p>
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<blockquote> <p>However, my only caveat to a beginner investor regarding these magazines is that due to the journalistic need to always find something new and interesting to report, they will often highlight that particular month or quarter's investment stars while giving short shrift to boring, mundane index funds that deliver consistent returns over long periods of time.<<</p> </blockquote>
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<p>Good point, lonestardad. I still subscribe to Money, but don't use it to choose specific investments. I do find it useful to highlight and explain things on the financial horizon I don't understand (like 529s, for example) and I do find some of the personal stories compelling.</p>
<p>I have a few ideas for you that haven't been mentioned, and are more or less "old-fashioned" advice as opposed to investment advice.</p>
<p>1) Get son involved. Level with your teenager about money, let him participate in the planning. Show him how much each category will cost. If you get him used to the idea, for instance, that he will be responsible for raising $ for x, y, and z (books, laundry, snacks, recreation, whatever) over summers/work study, he will take the entire subject more seriously, I guarantee it. Resist the urge to provide everything for "our darling son." This is an excellent opportunity to teach money management, for which your son will be eternally grateful after he reaches the age of 25 ;)</p>
<p>2) Get everyone else you possibly can involved. If grandparents lavish "toys" on S at birthday, ask them to spend half as much and put the rest in his college savings. You and everyone else you can think of (GPs, Sibs without children, aunts/uncles/cousins without dependents) should have a Upromise card that is focused on S. Check out <a href="http://www.Upromise.com%5B/url%5D">http://www.Upromise.com</a> . And have S write a thank-you note to those who sign up.</p>
<p>3) A book for you, "Wealth of Experience" which is a compilation of solid advice from long-time investors, published by the Vanguard Group (of the mutual fund fame, and here I absolutely agree with lonestardad--you are paying way too much for MorganStanley advice). Vanguard interviewed their long-time investors, and you will find in the book my technique for teaching children how to save. This will be very good for your preschooler. You can get it from Vanguard if it isn't in your library.</p>
<p>Thanks <em>a lot</em> for all that advice, especially the tips for beginning investors. Nice to have some avenues to consider in beginning the general 'education process' in finances (we should probably be learning more generally, for retirement/savings purposes as well!!). </p>
<p>Now worried about the Morgan Stanley advisor thing (I've been reading some negatives about them lately --- e.g. CEO w/ a$30 mil golden parachute after less than a year---but trying not to think about it....) My concern---we <em>already</em> paid a consulting fee, so if we switched firms, we'd be paying another entity a second fee, even if it was lower than Morgan.</p>
<p>I totally agree on letting son get involved in the financial aspect. I've talked to him already about the cost of college, the importance of it, and strategies for us <em>all</em> to raise money for it! He seems fairly on board. </p>
<p>My parents totally shielded me from the financial aspect of college (paid back all my loans themselves, etc.). While good-hearted, I don't think that was realistic or beneficial for learning about financial/life realities and the value of an education.</p>