Why did we choose a brokerage account over the 529 or UTMA plan

  • We considered a 529 or UTMA plan to save money for our daughters’ future.
  • However, we are not sure that they will continue with higher education, so we did not use the 529 plan.
  • We also didn’t think UTMA was appropriate, so we opted for a brokerage account instead.
  • Compare the best savings accounts with Fiona.

When my husband and I started saving for our two daughters, we knew we wanted to invest money in the stock market. We also knew we wanted to be able to provide them with money regardless of whether they chose to go to college, such as helping to buy a house or starting a business.

When we started researching options, we realized that some of the more popular options, like the 529 plan and UTMA (Uniform Transfer Act for Minors), weren’t necessarily the best options for us.

Why didn’t we choose the 529 college savings plan

Although a 529 plan is a very popular option for caregivers looking to save for a child’s college education, the money can only be used for education expenses. If a child chooses not to go to college, the money can be transferred to another child or family member, or to the child’s own children.

Investing under a 529 plan also allows for tax-deferred savings and tax-free withdrawals if the money is used for qualified education expenses. If a child chooses not to go to college and the money is not transferred to another family member, however, the account can be closed and the money withdrawn but an additional 10% tax and fee will be charged.

While we expect there will be a good chance our girls will go to college, it’s hard to say for sure. The educational landscape is changing rapidly and we know that the next 15 years will bring about even more change. While I don’t doubt that more education and training would be critical, I’m not sure if our kids would take the same four-year college path that we took, which is why we’ve decided not to start 529 at this time.

Why didn’t we choose UTMA for future preservation

We also considered opening a UTMA account, which would allow us to invest money and avoid gift tax consequences in the future.

However, the funds in the UTMA account are automatically transferred to the minor when they reach the legal age, which is 21 where we live. While 21 seems like an old enough age to hand over money, we also know there’s a chance our child won’t be responsible enough to deal with unexpected financial gains. Of course we hope for the best, but we also know that life happens, and we don’t want the extra stress or poor decision making that might come with a big financial gift.

If we want to transfer the stock to a UTMA account later, we can do so as our children approach legal age and feel they have a good plan for getting paid.

Why we chose a brokerage account to save money for our kids

Investing our children’s money in a brokerage account nowadays allows us to diversify investments in the way we see fit, including changing their risk tolerance as they get older and the purpose of the funds becomes clearer.

“The number one determining factor when it comes to choosing any investment is the time horizon,” says Taylor Sohns, CFP and co-founder of LifeGoal Investments and Home Down Payment Fund (HOM). “Parents with younger children have the ability to take more risks, while those with older children need to be more concerned about protecting against negative risks.”

For most people, a 529 or UTMA plan makes perfect sense. And while we love the tax benefits of both of these types of accounts, we didn’t know that neither was right for us at this time. Between the restrictions on how the funds can be used for the 529 and the young age the funds are automatically transferred to the beneficiary in UTMA, we decided to go a different route.

Since most of our investments are in Fidelity, we opened another brokerage account and assigned it to our daughter’s futures contracts, knowing that we could change the medium of these funds in the future if necessary. Whether it is to pursue additional education, buy real estate, or start a business, the funds will be available to them.

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