FASFA College question

[LivingAlmostLarge]

To all college age parents or those who have recently had a kid in college how does saving for it work? I'm not being sarcastic but I am about to invest a sum of money into each kids UGMA accounts. Currently we have Coverdell savings accounts with $25-30k for each child and we've been doing the $2k/year since birth. DH earned money from being executor of his uncle's estate. In order for his parents not to be pissed he's giving it to the kids. It's about $15k each. Currently they have $10k in each UGMA because we've tossed in random money, his same uncle gifted each kid $1000 of apple shares at birth (it's grown), and we've tossed in a couple bucks here and there.

I just go the $15k/each and was about to stick it into their accounts. It's been in cash since November 2019 (took 3+ years to settle estate). Anyway I am going to invest it in VTI for both kiddos. I know that I'm supposed to turn it over at 18 but at 9 and 7 neither work so I can't obviously open a Roth IRA account for either. But the will each have around $25k in their UGMA accounts left to grow for say the next 10+ years.

How will this affect their college FASFA? I'm hoping to cover most of college from our pockets/ESA Accounts. Then allow them to have the UGMA as a house down payment/investment account/etc. We make a good amount of money. Will this affect them? We are likely in the category of parents needing to pay 100% for college. I'm not even sure if a private school will give us anything.

So should I give the kids the money? Or just open a separate investment account earmarked for them but under our names? I realize I need to file tax returns for both kids now. But i'm trying to figure out the best way. I really want to give the kids the money because my MIL hates me so if I touch it she'll just harangue my DH about touching an "inheritance". Soo...

[Like2Plan]

Hmmm. Well, the one area that I regretted saving for DS was UGMA money... Why? For one thing, the tax law changed several times over the course of saving and not in a good way. I noticed that the kiddie tax has changed two more times in the past couple of years, so I am not touch with the finer points. I think last year UGMA gains (after a fairly low threshold) was taxed at a higher trust rate, but that has been repealed and it's back to the parent's rate. But, let's tick off the disadvantages to saving into a UGMA, shall we?

1. The child can spend the money however they like when they reach majority.
2. It can be taxed at the parent's income tax rate if there are high enough earnings.
3. The UGMA gains (if high enough) are taxed at the parent's rate all the way through college--most likely making it wiser to wait until after college to use the money if there are substantial gains.
4. A higher percentage of UGMA money is expected to be used for the child's expected contribution towards college costs.
5. Despite it being the child's money, it can sometimes be a real trick to get the accounts re-registered in the child's name. (I had a demand for a birth certificate and gold medallion signatures of both DS and myself on one of the accounts. )
6. Congress is always changing the rules making it very difficult to come up with a strategy to optimize.
7. The basis is according to when you the parent purchased the stock. (This isn't as big of a deal since 2012 when congress made it a law for the brokerage to keep track of the basis). But, anyway, the child might not be tracking the basis information.
8. It is considered an incomplete transfer--and would be considered part of the parent's estate in the unfortunate case where the custodial parent passes away prior to the child reaching the age of majority.

So, if you save the money into stocks that are in your spouse's name and the stock appreciates--you could gift the stocks to your daughters after they graduate from college. They could cash in the stocks--assuming the stock meets the LTG criteria they pay for long term capital gains (at their rate) and they use it for a down payment on their house or their wedding or whatever. Meanwhile, you have more of a say as to what happens to it.

[LivingAlmostLarge]

but if we gift the kids the money then it'll be subject to gift tax? Unless we keep it under $15k/year

[Like2Plan]

but if we gift the kids the money then it'll be subject to gift tax? Unless we keep it under $15k/year

They wont be, but you will be--but unless you expect your estate to exceed 11.4 million (or congress lowers the ceiling), you just file paperwork. https://livengoodlaw.com/2019-estate...ft-tax-update/

The 15k limit can be mitigated somewhat by a 15K gift from you and a 15K gift from your spouse to each daughter and in the case of a wedding gift, you could each could make 15k gifts to your (at some point in the future) S-I-L. And, you could spread it out over a couple of years...

[Thrif-t]

Since you're going to be full pay it probably won't matter. But any money in the kids names, 20% of it is calculated to go towards paying for college in the FAFSA calculations.

If it were me, I'd open 2 Roth IRA's, one in my name for one kid, one in DH's name for the other. If you haven't already invested for yourself you could do one for 2019 (b4 April 15th) and the other for 2020. There! all money gone and whenever you want to give it to them for whatever, you can withdraw the 15k each tax free.

And if the money is in your name it won't affect them in the fafsa.

[Like2Plan]

Assuming this is for college, I agree with Trif-t that if you DH keeps on working it is unlikely that you will get any help with college through FAFSA. Loans-yes, but why would you want to pay more for college with the interest payments?

I would say Roth's, too, but I don't think you can contribute directly in your situation and also you may be need that tax advantaged space for your own retirement.

The American Opportunity Credit and Lifetime Learning Credit are phased out if your MAGI exceeds a certain level. So, if you are not going to get to be able to use those credits about the only other option for tax advantaged savings is 529 plans. I have been very impressed with the Washington State GET program over the years. But, you don't have to use that one--you can invest in any 529 plan. It solves just about every problem listed above with the UGMA plans.

[LivingAlmostLarge]

Since you're going to be full pay it probably won't matter. But any money in the kids names, 20% of it is calculated to go towards paying for college in the FAFSA calculations.

If it were me, I'd open 2 Roth IRA's, one in my name for one kid, one in DH's name for the other. If you haven't already invested for yourself you could do one for 2019 (b4 April 15th) and the other for 2020. There! all money gone and whenever you want to give it to them for whatever, you can withdraw the 15k each tax free.

And if the money is in your name it won't affect them in the fafsa.

How do you open a Roth IRA in the kids names? We already have Roth IRAs for ourselves that is going to be used for our retirement.

Okay I checked
DK 1 (9) - $36k ESA - $16k more contributions till 18
Dk2 (7) - $26k ESA - $20k more in contributions till 18

Dk1 Taxable - $7300 + $12750
DK 2 Taxable $6700 + $12250

So I thought about a 529, but I'm worried I'll over save for college and then pay a 10% penalty for exceess income. If we have already $50k for both kids and I contribute the $12.5k to each now I might have more than $100k? Which is the going rate of the room and board at 4 year in state tuition/room and board? Thoughts?

That was a suggestion from coworker. Second I sort of do want to give the kids money for a house and I'm thinking maybe if we do this now $20k now might give them a hefty downpayment on a condo the day they graduate and decide. Gosh if DH and I had gotten that sort of leg up plus nudging them into a roth IRA as soon as they start to work we'd have a lot more money. They don't have to be quite so serious about saving and can instead really have a lot by 30.

[disneysteve]

As with most things, it's not an all or nothing decision. If you're concerned you'd save too much in a 529, don't use that as your sole vehicle. Put most of the money in there but also put some in a non-earmarked account. And if the 529 balance starts approaching the max you think you need in there in a few years, stop contributing. At least you'll benefit from the tax-free growth.

[Like2Plan]

Your kids would have to have earned income in order to contribute to a Roth in their own name. But, you could kept the $$ in your DH's name, wait until the children graduated from college and started a job and your DH could fund their Roth accounts every year with the money earmarked for them.

But, I don't think 100k is over saving for college. And, even if it was more than what was required for an undergraduate degree, they could use the $$ left over for graduate school.

[kork13]

So I thought about a 529, but I'm worried I'll over save for college and then pay a 10% penalty for exceess income. If we have already $50k for both kids and I contribute the $12.5k to each now I might have more than $100k? Which is the going rate of the room and board at 4 year in state tuition/room and board? Thoughts?

That was a suggestion from coworker. Second I sort of do want to give the kids money for a house and I'm thinking maybe if we do this now $20k now might give them a hefty downpayment on a condo the day they graduate and decide. Gosh if DH and I had gotten that sort of leg up plus nudging them into a roth IRA as soon as they start to work we'd have a lot more money. They don't have to be quite so serious about saving and can instead really have a lot by 30.

For what it's worth... I agree with you completely -- that's basically the same plan that I've got for my kids. I know that it'll mean they get zero help from FAFSA, and it may even cost me some extra taxes over time (future-me problems), but I have every intention of starting my kids off on a strong footing -- college paid for, and some initial financial help with moving into their adult lives. Personally, I'm just using a 529 for each of them, planning to cover 50%-75% of their college expenses with those (the rest probably a combination of their work & my cashflow), which will also ensure I don't over-save for college. In addition, I'm also slowly building a UTMA for each of them, which they can use to get started after college.

Most perfect option? Probably not. But I like the plan & that's what I'm going with. I'm honestly not over-thinking it, because (A) it's still 15 years away, plenty of time to narrow down firm details; and (B) my going-in plan is to only help -- in a big way, yes, but if my plans don't cover 100% of their needs, that's fine, because they can contribute to it, and I'll have the financial flexibility to help further as needed/desired.

[Like2Plan]

Here is the link to the University of Washington estimated first year costs for 2019-20:

https://www.washington.edu/opb/tuition-fees/estimated-annual-cost-of-attendance-for-first-year-undergraduates/

[Thrif-t]

How do you open a Roth IRA in the kids names? We already have Roth IRAs for ourselves that is going to be used for our retirement.

You can't until they work and have earned income.

I'd open a roth in your NAME that you would use in the future for one of them, and your DH would do the same.

Remember you can withdraw ALL the money you put in a roth tax free. You just can't touch the earnings. Having it in a Roth would shield it from the Fafsa calculations, which in your case doesn't seem to matter. In my case it did, so $ that my kids didn't need for school we shielded in Roths in their names, they were older and had part time jobs.

[LivingAlmostLarge]

You can't until they work and have earned income.

I'd open a roth in your NAME that you would use in the future for one of them, and your DH would do the same.

Remember you can withdraw ALL the money you put in a roth tax free. You just can't touch the earnings. Having it in a Roth would shield it from the Fafsa calculations, which in your case doesn't seem to matter. In my case it did, so $ that my kids didn't need for school we shielded in Roths in their names, they were older and had part time jobs.

I'm selfish.I am planning on using my roth for myself

$120k 4 years in state now. Hmm...I think it'll be close. With contributions we are looking at close to that much saved.

[Milly]

My local credit union hired a "free" financial adviser for their members. (Free consultation, not free if you have him do anything for you). I talked to him about this one. First he grumbled that the 529 and FAFSA systems rewarded the unprepared and punished the prepared, then he promoted two options:

1. If you expect your kid to be level headed and not go crazy if they suddenly get $30k when they turn 18 (or whatever the age is for your account), you can put it in an investment account for your kid. It will be taxed at the kid's income rate. He also pointed out that method might ruin some kid's lives, so you've really got to teach your kid about money and about life priorities and hope it sticks.

2. You can just put your money in a Roth IRA. You won't be able to pull out any gains until you are retiring (without major tax consequences), but the principle is available 5 years after the account is opened (as in you can set it up with $100, then dump $100,000 in five years later, then withdraw $100,100 the very next day, but not any gains you had on that money). It won't grow and multiply your ability to pay for your kid's college because the interest is untouchable, but it won't be sitting idle or near idle in a savings account or CD either. It will be growing for your personal retirement use.

Here's my personal opinion: college debt is such a political topic right now that things are definitely going to change between now and when my 6 year old graduates HS. We might get crappy state college for all, forcing those who want to actually learn or stand out to go to extremely expensive private colleges, or college prices might be brought down (either through intervention or through the government backing out and letting free market forces pull away the abundant capital available for college students). Until I can see a little further into the future, I'd rather get my general use investments up and set myself up to pay for college out of pocket if it is needed.

What I'm actually doing: For the past 7 years, I have been aggressively paying down my house to where we are almost finished even at minimum payments. We bought our first investment property, which should be paid off by the time she hits college. We might even be able to get another one by then, but we'll start where we are and create a fat margin of safety before taking on another one. With those both paid off, we should be able to pocket a ton of cash monthly and pay for at least one student outright. Hopefully between their work, scholarships, etc. we can afford to help out all 3 when the oldest are in college at the same time. My parents had 4 kids in college at once for 2 years (2010-2011) and 3 kids in college for a year on each side of that. They also had no explicit college savings. They made it work just fine. I think all of us graduated debt free and they never paid more than half tuition for any of us. God makes things work when you trust him and are good stewards with what he blesses you with.

[sblatner]

We did just what Milly wrote. Put everything to the mortgage and paid off the house a few years before the oldest went to college and then paid cash for college either out of savings or current income. We were lucky neither kid went to a private school but in five years, it was almost $200k. Now we are done with our mortgage and college and are doing the things we have wanted to do but couldn't.