As we put away the dishes from our Thanksgiving celebrations, it's time to start thinking about the December holidays and what to get those lucky young ones on our “nice” list.
But how soon before our present is no longer “cool” and gets set aside for the next trendy item? What will they really enjoy or use? A warm sweater? A game/app for their ever changing computer?
Here's another thought: what about a contribution to their future?
For those who have come to know my writing style, you have heard me discuss traditional savings accounts frequently when I wrote the Cents and Sensibility column for Baltimore's Child Magazine. For starters, each member of a family needs to have a bank account in his or her own name. Remember having a passbook savings account when you were growing up, feeling “rich” even with $100? Remember back when your savings actually EARNED interest at a substantial rate? Ah, I miss those days...
Every child wants things, whether it's new sneakers, a computer, a trip after high school, or a college education. If you set them up with a savings account when they're young, then as ninth-graders, when they want to go to camping or on a ski trip, they will have their own savings to pay for it. Having their own money is empowering for them—while, at the same time, they can't access their account without you. Gotta retain some control, right?
Additionally, there are 529 college savings plans. A great resource for information about these is the website www.savingforcollege.com. It offers plan comparisons, links to the websites of companies that operate the various plans, and details on tax benefits.
A 529 plan functions like an investment account, in which you can make one-time or monthly contributions from your checking account (often easily set up online), and the assets grow tax deferred until withdrawal—so long as they are used to finance specific academic purposes (i.e., tuition, fees, books, computers, etc.) at an accredited institution of higher learning.
A 529 account owner (parent, grandparent, aunt) can deduct up to the limit set by the state from his or her state tax return per account opened for each child, while retaining the power to switch the investments or name a new beneficiary (student). If the account owner decides to spend the money on him- or herself, however, back into their estate it lands. Prospective account owners should also consider and review the applicable account administrative fees and expenses.
The gifting exemption for fiscal year 2017 and 2018 is $14,000, but account owners are allowed to contribute up to five years worth in a single year per account. With two parents contributing that maximum, that would be $140,000, without income limitations or reporting concerns, to their child's account. However, they could not make another contribution until year six. To determine the best gifting strategies for your family, talk to your accountant and financial advisor.
An important note...I have run into cases where the 529 is over-funded (can you imagine?) and the parents still provide the student "walk around spending money". The IRS is very specific about spending the funds for college purposes only, and travel to and from school for holidays or to see an "away game", hotels when parents visit, pizza, chips and soda don't qualify. Compliance with the IRS rules is critical to planning, therefore we keep building up the investment and/or savings account alongside the 529.
When my kids were christened, the money they received as gifts went into their savings accounts, and later their 529 plans. Now that they are losing teeth and the Tooth Fairy resources are being depleted during the night, or they got money for their birthday, part went into their savings and part stayed with them for treats. Any money they receive at Christmas: some to the savings account, some to the 529.
How do you give a child, other than your own, money without leading him or her to conclude that it must be all for toys? Oooh, a toughie. I would write two separate checks and put them in two separate envelopes: one noted as “Susie FUN,” the other as “Susie SAVE”—but I would only present little Susie with the FUN one. Give the other to the parent, just to keep some peace. Otherwise, I could envision that meltdown, couldn't you?
Most importantly, get a funny card or a small toy to go with it. A plain old envelope is boring— there's no other word for it. A trinket, a hair tie, Rainbow Loom color bands, a card that sings—all these retain your cool factor, “saving” you in yet another way.
Happy gifting, everyone.
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. BC
Annie Morrison is an independent advisor representative with and securities and advisory services offered through Commonwealth Financial Network, a Registered Investment Advisor, Member FINRA/SIPC. Zuma Financial Advisors is located in Reisterstown, MD. Email her, at [email protected], or call (443) 468-3280.
The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.