Saving for a Child/Grandchild

What are some ways that you can save for a child or grandchild, and how do those accounts affect college aid in the future?  Here are two types of popular accounts, details on taxation, along with how they affect college aid in the future.

For determining financial aid eligibility, applicants file a FAFSA that details the previous year’s assets and income of both the child and the parent(s).  The higher the incomes and assets, the less of a chance to qualify for the preferred financial aid packages such as the Pell Grant, Work Study, and Subsidized Student Loans.  Student loans and scholarships are still available for those who do not qualify for the preferred financial aid packages.

529 – An investment account where earnings grow tax-free, and withdrawals are tax-free as long as they are used for college related expenses.  These accounts provide a NY state income tax deduction for contributions, and can be re-registered to another child at anytime.

If owned by the parent, these accounts are considered a parental asset, and receive preferential treatment in terms of the above referenced financial aid calculation.  In addition, withdrawals are not counted as income for either the parent or child.  Withdrawals for non-college related reasons result in tax and penalty implications.

If a grandparent or other relative owns the 529, the withdrawals are counted as the child’s income and can decrease financial aid eligibility.  In these situations, it can be advisable to wait until after the last FAFSA has been filed, and the child is in their last years of college to withdraw funds so they do not affect financial aid eligibility.

UTMA – An investment account in the name of a child, but controlled by a guardian until the child’s age of 21.  Withdrawals can be made at anytime and for any reason as long as it is for the benefit of the child.  There are no tax implications until the investments generate over $1,050 of income during a calendar year.

The downside is in terms of financial aid, the UTMA is counted as a student asset and could decrease eligibility for preferred financial aid.  That said, if you are sure the child is going to go to college, you can transfer the UTMA into a 529 prior to the child going to college.

In summary, the 529 provides great tax benefits and is helpful for college planning, but really is specific for college.  The UTMA is an investment vehicle providing greater flexibility for a child that may use the funds prior to college, or not go to college at all.

If you are interested in setting up either a 529 or UTMA for a child, please contact the office and I’d be glad to help.