All Things Financial Planning Blog

What if College Isn’t the Answer?

3 Comments


A 529 plan is a savings plan that allows individuals to save for a beneficiary’s college expenses. Invested funds grow tax free and, provided they are used at colleges throughout the country for an array of qualified purposes, are tax free upon withdrawal. As a planner, this is typically the first thing mentioned when talk turns to saving for a child or grandchild’s college expenses. There are situations where I would not recommend a 529 plan, but all in all, it’s a fantastic tool.

But, what if college isn’t the goal? I’ve run into several situations lately where people have asked how best to save for a child or grandchild that, for a variety of reasons, isn’t headed to college. Some have special needs, choose to start a business, or find an opportunity that doesn’t require a degree. In other cases, parents or grandparents would like to earmark funds for their heirs, but it doesn’t make sense to restrict funds they may need for their own well being in the future.

So, if college isn’t the answer or you want to set money aside, but not restrict its use, what are other tools you can use to make sure you’re saving as efficiently as possible?

Retirement / Long Term Care Insurance
One of the best ways to help children or grandchildren is to not burden them financially as you age. Your heirs can borrow money for houses, cars, or business ventures, but you can’t borrow money for retirement! Making sure you have adequate savings for the retirement you envision and communicating this with your heirs is a great way of letting them know they should plan for their futures knowing that Mom & Dad or Grandma & Grandpa are secure.

If retirement savings are in place, it might be a good idea to evaluate long term care insurance. This is an additional step in securing your future than can provide you and your family peace of mind in the event of a prolonged illness or other condition that provides ongoing care.

With both those pieces in place, remaining savings can be used to help children or grandchildren. There aren’t any significant tax benefits to managing things in this way, but sometimes simplicity is its own reward.

UTMA/UGMA Accounts
Each state has their own rules, but these accounts reference the Uniform Transfer to Minors Act which allow a custodian to exercise control over the account while still allowing funds to be considered titled to the minor beneficiary. The potential gifting opportunities are a plus, but consideration should be given to how much money is placed in these accounts as, by age 21 (18 in some states), the money will be under the full control of the beneficiary.

Trust
In the case where passing on control at age 18 or 21 is not desired, a Trust might be a better tool. Trusts can be established with a wide variety of requirements or restrictions for use. They are more expensive and can be complex, but the increased protection can be well worth it in the right circumstance.

Special Needs Trust
These operate much like a typical trust, but instead of dissolving once heirs reach a certain age, they provide for the specific needs of heirs who may not be able to handle their own finances even as adults.

Roth
There is no minimum age for starting a Roth IRA. However, the child or grandchild in question must have earned income in order to contribute. From there, they can contribute up to the lesser of $5,000 or the amount they’ve earned. If they earned $3,000 bagging groceries, you can gift $3,000 to their Roth IRA. The drawback here again is that, at the age of majority, the account is theirs. While there are taxes and penalties involved for withdrawing before age 59 ½, this is not always enough of a drawback for young people to take the money. If this is a concern, a trust is again something to consider.

All of these tools, when used properly and with some education of the intended beneficiary, can be excellent ways to give your child or grandchild a leap forward regardless of their plans beyond high school. It all comes down to your specific situation, proper planning and talking through what would be best for all parties involved. Remember to first pay attention to your own financial picture. Like the oxygen mask instructions on any flight, securing your financial picture first should be paramount to helping others.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH

Author: Chip Workman, CFP®

Chip Workman, CFP®, MBA is a Lead Advisor for The Asset Advisory Group in Cincinnati, Ohio. The Asset Advisory Group is an independent, fee-only RIA whose mission is to provide for their clients’ financial and emotional security through comprehensive financial planning and disciplined investment management. In addition to his work with clients, Chip writes for the firm’s blog at http://taaginc.blogspot.com, volunteers for various financial literacy programs and is actively involved with CISV, an international peace education organization where Chip sits on the National Board, chairs the Finance Committee and serves as the local chapter’s Treasurer. He is also a member of the Financial Planning Association and their NexGen community of young financial advisors. Prior to joining the firm, Chip spent his career as a Private Banking and Trust Officer, advising high net worth clients on a variety of personal financial issues. Chip completed his undergraduate studies at Miami University in Oxford, OH and his MBA in Finance at Xavier University, where he now serves as an Executive Mentor for undergraduates.

3 thoughts on “What if College Isn’t the Answer?

  1. Chip, this is some very helpful information for grandparents. One thing I would like to add, as a college financial aid advisor, is that UTMA/UGMA accounts are not appropriate vehicles for those grandchildren who may potentially be college-bound. The colleges will assess those accounts between 20% and 25% each year, for the college financial aid calculations.

    If a family has no possibility for need-based aid eligibility, then these types of accounts work fine. However, if there is any chance for need-based aid for a student, then the UTMA/UGMA account will be detrimental to their financial aid opportunities.

  2. So on the whole is it only beneficial for the college students? or for anybody else?

  3. Good point, that. Not all college-age kids go to college. Great alternatives too.

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