Saving for Your Child

One question that many parents ponder is the best way to save for their child’s future.  There are many different opinions on this.  While many people are familiar with state sponsored 529 plans as a way to save for college, there is another option, the UTMA account.

With the 529 college savings account you are able to save money on a tax deferred basis and if you use a plan sponsored by the state you live in most will let you have some sort of state tax credit for the contributions you make.  As long as your child goes to college the money and earnings can be pulled out tax free for higher education expenses.

An UTMA (Uniform Transfer to Minors Act) account is another way to save for your child.  You do not receive a state tax credit for contributions made and the taxes are handled a little differently as well.  Current law states that each year up to $1,050 in earnings is tax free.  The next $1,050 is taxed at the child’s tax rate.  Any earnings over $2,100 are taxed at the parent’s tax rate.  Another difference is that in 529 plans you can change the beneficiary of the account and designate the money to another child.  Contributions to an UTMA account are considered an irrevocable gift to the child.

Although each situation is different, I prefer the UTMA account in most instances.  This is the type of account I have chosen to set up for my daughter.  One of the main reasons I chose the UTMA account for my daughter is the interactive learning experience for her.  In 529 accounts you are limited to the mutual funds that the 529 plan offers.  The investment opportunities you have in UTMA accounts are much broader.  Personally, I have chosen to invest in individual stocks for my daughter of blue-chip companies that she would know.  Each time she has enough money to buy a stock I give her three options of companies that she would recognize that I feel are a good value.  I have been doing this with her since age 3.  This has given her a sense of ownership of her portfolio in a way that I don’t feel like a 529 plan could.  It has also allowed her to learn about various companies and more about how investing works.  At age 8 she can now list every single company in her portfolio, what they do, and her gain/loss on each investment.  We also regularly talk about why the stocks she owns are going up or down and look at charts of them about once per month.  I’m not sure what my daughter will end up doing as a future career but I do know that her having a knowledge about investing and the stock market will be a skill that will serve her well for the rest of her life.

Another thing I like about the UTMA accounts is the flexibility you have with the money.  What if your child decides to go to trade school or gets a full ride scholarship to college or needs a new car at age 20?  In a 529 account any earnings portion not used for educational expenses is subject to a 10% tax penalty.  That is not the case in the UTMA account as the funds can be used for any expenses.

There are positives and negatives for each choice you have to save for your child.  However, I think that teaching your child to become financially literate and investment savvy at a young age is a skill that will serve them well throughout life and certainly not one that most will be taught at school.  My wife comments now that our daughter knows more at age 8 about investing and finances than she did in college, which is an awesome thing for her.  Giving your child the greatest learning experience about investing is best done through a UTMA account and that alone outweighs any negatives about that type of an account vs. a 529 plan in my opinion. This will allow the child to take a more active role and ownership of their account.  We need a generation of young people to grow up to be financially literate and an UTMA account is a great way to get them started.

Robert David

Portfolio Manager & Financial Advisor

Bluewater Investment Strategies, a member of Advisory Services Network, LLC