The beginning of a new school year is a good time to think about planning ahead for the costs of college for your children. Five key variables to consider in your analysis are: time horizon, cost assumptions, available resources, account structure, and investment strategy.
A previous article, published for the October 2014 issue of Living at the Hill, addressed the first three of these variables. You may find a link to this article here Blueprint for College Savings – Part I.
COLLEGE SAVINGS ACCOUNT STRUCTURE
This article discusses the fourth variable, account structure, which should be considered when thinking about financially preparing for your children’s future.
Account structure identifies how and where the funds will be accumulated, i.e. what type of account is best for your particular situation. Should the funds be accumulated in the parents name, the child’s name, or a type of hybrid structure that could offer better tax advantages such as a Section 529 College Savings Plan or Section 529 College Investment Plan? When considering the type of account structure, one key factor is how much control over the funds you would like to retain, or give to your child. A second factor is which type of account structure offers the best strategy for minimizing tax consequences. It is important to emphasize that tax considerations are an important factor, but rarely the most important factor and should always be weighed against all other factors. Here is a summary of key considerations when thinking about education funding account ownership issues:
HOLDING ASSETS IN PARENT’S NAME
|¨ Qualifying for financial aid||¨ No tax advantages|
|¨ Parents maintain control||¨ Income taxed at parent’s rate|
|¨ Parents maintain ownership|
|¨ Flexibility – funds available for other needs|
HOLDING ASSETS IN CHILD’S NAME
|¨ Easy to establish||¨ Does not avoid kiddie tax|
|¨ Parents maintain some control||¨ Qualifying for financial aid|
|¨ Child legally owns the assets|
|¨ Transfer of funds is irrevocable|
|¨ Child controls at age of majority|
Section 529 College Savings and College Investment Plans typically contain a designated account owner and an account beneficiary. Some of the considerations listed above might also apply. Although a discussion of Section 529 Plans is unable to be included in the scope of this article due to space constraints, the table below lists some very important questions to ask when evaluating Section 529 Plans:
SECTION 529 PLANS – A FEW IMPORTANT QUESTIONS TO ASK
|Contributions||What is the limit on the maximum annual contribution per beneficiary?|
|Contributions||What is the minimum lifetime contribution per beneficiary?|
|Flexibility||Are the funds portable to 529 Plans in other states?|
|Flexibility||Can the account owner and beneficiary be changed?|
|Flexibility||Can a contingent beneficiary be designated?|
|Stability||How long has a particular plan been in-force?|
|Stability||Are plan assets backed by the state in the event of plan default?|
|Income Tax||What is the maximum deferral period of the plan?|
|Income Tax||Will state income tax deductions for contributions be allowed?|
|Estate Tax||Are state gift-tax consequences incurred?|
|Investment||Who is the Investment Adviser to the Plan?|
|Investment||What annual fees are incurred for investment management?|
|Investment||What asset allocation strategy will be used?|
The final parameter to be considered in your college funding plan is the investment strategy. This could be a complex topic for a future article.
Christopher P. Parr, CFP®, is a River Hill resident and president of Parr Financial Solutions, Inc., a Columbia-based, independent, fee-only, wealth management firm. He can be reached at 410-740-9011 or online: www.ParrFinancialSolutions.com.
This article was written for the August 2015 issue of River Hill Magazine.