April 2011


Sorry for not posting as promised this morning! Our family vacation to Disney World was great, but getting back in the swing of things this morning proved more difficult than we thought! Since we didn’t have the time to put a quality post together, we just wanted to  let you know we will be resuming next Monday. No excuses this time!

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Since we’ve spent over a month now discussing investments for college savings, we wanted to talk about something simpler. Last week on The Simple Dollar, Trent Hamm wrote a post called The Old Green Chair. It was fairly short and simple, but the idea he conveys is one that many people struggle with.

In the post, Trent talks about this ugly, old, bright green chair he and his wife bought second hand when they first were married. Then, though the chair was comfortable and got a lot of use, they replaced it: “As a young professional couple, we were supposed to have nice furniture in our home.” So, they didn’t get rid of the chair because they didn’t want it any more. They felt like they should get rid of it because they were supposed to have nicer furniture.

This reasoning is often behind many of the decisions we make, financially and otherwise. You buy a shiny new car when you land your first job because that’s what young professionals are supposed to do. You buy a house when you get married because that what newly married couples are supposed to do. And so on. While it may not be your only reason for doing so, often the thought that you are supposed to be doing something in particular in your life often resides in the back of your mind.

Everyone’s opinions are different on what people are supposed to do, so don’t worry so much about it. Think about what is right for you in your individual situation, and if someone else is going to look down on you for that, so be it. For Trent, “The biggest financial mistake my wife and I ever made was worrying about what people like us were supposed to do. If we had simply focused instead on what made us happy, we would have found ourselves in a much better financial place all the way along.”

There will be no post next Monday. We are going on a family vacation to Disney World which we’re very excited about!

The last types of accounts we’ll discuss in our Planning for College series are Uniform Gift to Minors Act/Uniform Transfer to Minors Act (UGMA/UTMA). These types of accounts are different from the others we have discussed because they are considered an asset of the child, not the parent.

 

The above listed reason is UGMA/UTMA accounts major disadvantage, and also the reason why we don’t like these types of accounts. Not only will the account count as a student asset in federal financial aid calculations at the higher rate, but it will also take control of the account out of your hands.

 

While the child is a minor, you control the account. You can withdraw the money as you see fit, but when the child reaches the age of majority, 18 or 21 depending on the state, the UGMA/UTMA becomes completely under their control to do with as they please.

 

This can be a danger because the money you have worked so hard to save for your kid’s education can be used for whatever they choose. And considering there is no contribution limit (though gift tax limitation do apply), the account balance could be significant. Opening an UGMA/UTMA for your child’s education is putting a lot of trust in a young adult that may not be ready for the responsibility. If they withdraw all the money to spend elsewhere, there is nothing you can do to stop them.

 

Also, if your potential student doesn’t pursue higher education, it’s still their money. You can’t transfer it to another beneficiary or keep it for your own benefit as with the other education savings accounts. Additionally, withdrawals are not tax free when used for qualified education expenses. The income is usually taxed, though potentially at the child’s tax rate, not the parent’s. So, there aren’t any additional tax benefits to using UGMA/UTMA accounts for education.

 

As we said, we think there are much better options for education savings than an UGMA/UTMA account, but since they are popular accounts, we wanted to cover them. If you do choose to use an UGMA/UTMA account, keep in mind the dangers and don’t rely on the money for your sole source of education savings. They can be useful in preparing for college in buying computers, supplies, etc. before your child leaves high school.

 

Hopefully you enjoyed our Planning for College series. As we’ve stated, please do your own research before choosing what type of account is right for your situation. There is a lot more information out there that we haven’t covered!