Strategic Planning for Your Kids

1. Consider an Automatic Savings Plan to Fund College. The costs of attending college are high and they keep growing. Transferring $250 each month to a child’s custodial account will accumulate to almost $39,000 over 10 years at a 4 percent earnings rate.

2. Save Early For College Costs. The cost of attending college is high. Many private universities cost over $43,000 per year and even public universities can be over $22,000. Here is a chart showing the monthly savings needed starting when the future college student is at different ages:

3. Think about Roth IRAs for Teens. Roth IRA contributions for a working teen can be the beginning of financial security. Contributions of up to $5,500 can grow tax deferred and distributions from a Roth IRA, after age 59 and 1/2, are not taxed.

A 16-year old making four contributions of $4,000 would have over $200,000 at age 65 assuming the funds earned 6 percent. Consult your tax adviser for complete details.

4. Consider All College Funding Options. For decades, parents have used custodial accounts to transfer funds to their minor children to help build assets for college costs. However, current tax law has enhanced the tax benefits of other types of asset ownership that should be considered. Coverdell Education Savings Accounts (Education IRAs) and Qualified Tuition Programs (Section 529 Plans) have become very attractive.

5. Fund College Costs with Custodial Accounts. With a custodial account, the parent creates an account on behalf of the minor child and transfers assets.  The custodian, usually a parent, manages the account until the child reaches legal age. At that point, the child can do whatever he or she wishes with the assets.

Transfers to these accounts are irrevocable. Income on the assets within a custodial account is subject to income tax.

6. Fund College Costs with Qualified Tuition Plans. Section 529 Plans are now offered by over 40 states. While the plans are offered by states, there are no restrictions on where the child attends college.

There are no income limits on the donors and contributions of up to $14,000 per year can be made in 2017 (and 2016). Earnings within the plan are not subject to being taxed and withdrawals used for qualified educational expenses are not taxed.

7. Understand the Income Tax Implications of Custodial Accounts for Children. Special tax rules apply to children under 18 and 18 year-olds with earned income less than half of their support, and 19 to 23 year old students with earned income less than half of their support.

For 2017 (and 2016), the tax laws provide that the first $1,050 of investment income from assets held in the child’s name is not taxed. The next $1,050 is taxed at the child’s tax rate.  Investment income greater than $2,000 is taxed at the parent’s rate until the child reaches age 18. These tax rules are referred to as “The Kiddie Tax.”