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When my husband and I started saving for our two daughters, we knew we wanted the money to be invested in the stock market. We also knew we wanted to be able to provide them with funds regardless if they chose to go to college, such as to help buy a home or start a business.
Although a 529 plan is an extremely popular choice for caregivers looking to save for a child's college education, the funds can only be used for education expenses. If the child chooses not to go to college, the funds can be passed to another child or family member, or to the child's own children down the line.
Investing within a 529 plan also allows for tax-deferred saving and tax-free withdrawals if the funds are used for qualifying education expenses. If the child chooses not to go to college and the funds are not transferred to another family member however, the account can be closed and funds withdrawn but taxes and an extra 10% fee will be charged.
While we expect that there's a good chance our girls will be college-bound, it's hard to say for sure. The education landscape is changing rapidly and we know that the next 15 years will bring even more change. While I don't doubt that further education and training will be paramount, I am not certain if our children will take the same four-year college path that we did, thus why we decided not to start a 529 at this time.
We also considered opening up a UTMA account, which would allow us to invest funds and avoid the gift tax consequences down the line.
However, the funds in a UTMA account are automatically transferred to the minor when they reach legal age, which is 21 where we live. While 21 sounds like an old enough age to turn over the funds, we also know there's a chance our child won't be responsible enough to handle a financial windfall. Of course we hope for the best, but we also know life happens, and don't want the added pressure or poor-decision making that could come along with a substantial monetary gift.
If we want to transfer the stock into a UTMA account later, we can do so as our children get closer to legal age and we feel they have a good plan for the funds.
Investing our children's money in a brokerage account right now allows us to diversify the investments how we see fit, including changing the risk tolerance as they get older and the purpose for the funds become clearer.
"The No. 1 determining factor when it comes to choosing any investment is the time horizon," says Taylor Sohns, CFP and cofounder of LifeGoal Investments and the Home Down Payment Fund (HOM). "Parents with younger kids have the ability to take more risk, whereas those with older kids need to be more concerned with protecting against downside risk."
For most people, a 529 or UTMA plan makes perfect sense. And while we love the tax advantages to both of these types of accounts, we knew neither was a good fit for us at this time. Between the limitations on how funds can be used for a 529 and the young age the funds are automatically transferred to the beneficiary in a UTMA, we decided to go a different route.
As most of our investments are at Fidelity, we opened up another brokerage account and earmarked it for our daughter's futures, knowing we can change the vehicle for these funds down the line if needed. Whether that's for pursuing further education, purchasing real estate, or starting a business, the funds will be there for them.