UTMA vs 529 vs ?

[Chris Allen]

Hi all, I wanted to get some specific advice as I am planning for my sons (and future children's) future, and am trying to decide on what type of account to open for my son to start investing

I originally was drawn to opening a custodial account (UTMA) so I could have more flexibility in the investments I make through the account, as well as allowing him to use the money for whatever he wants without penalty. But when I look at the tax benefits of the 529, I wonder if this outweighs the flexibility of UTMA? 

From my understanding, the 529 can grow tax free (awesome for compound interest), and if my son wanted to use the money for college, it would be tax free. But if he decided to not go to college and I didn't want to transfer to someone else, then it would have a 10% penalty and get taxed at his tax rate. would it make sense that the tax free growth of the 529 could make up for the lack of flexibility and fees?

Would love anyone else's thoughts or inputs for anyone who understands these accounts a little better than I do. 

@Scott Trench, you posted on a post of mine last year before he was born asking for general advice and I believe you mentioned the 529 does not look as good to you. Curious if you still hold that belief, and if you still think a custodial account is the way to go?

[David M.]

@Chris Allen

Yes the 529 does "partition" your funds for education only.  The 10% penalty is sort of the cost of a "backup plan" (having to pull it out for non-education).  I think the tax free part makes up for it.  Also, the 529 funds can be used for lots of "education."  Even for high school level apparently.  Even if your sons want to go to trade school.  You can even designate it later to your grandchildren.  So, the funds aren't "lost" or doomed to be penalized, its just for a particular purpose.

Happy to discuss what I know.  Good luck.

[Chris Allen]

Quote from @David M.:

@Chris Allen

Yes the 529 does "partition" your funds for education only.  The 10% penalty is sort of the cost of a "backup plan" (having to pull it out for non-education).  I think the tax free part makes up for it.  Also, the 529 funds can be used for lots of "education."  Even for high school level apparently.  Even if your sons want to go to trade school.  You can even designate it later to your grandchildren.  So, the funds aren't "lost" or doomed to be penalized, its just for a particular purpose.

Happy to discuss what I know.  Good luck.

 Thanks for your input! I would love to chat

[Carlos Ptriawan]

Quote from @Chris Allen:

Hi all, I wanted to get some specific advice as I am planning for my sons (and future children's) future, and am trying to decide on what type of account to open for my son to start investing

I originally was drawn to opening a custodial account (UTMA) so I could have more flexibility in the investments I make through the account, as well as allowing him to use the money for whatever he wants without penalty. But when I look at the tax benefits of the 529, I wonder if this outweighs the flexibility of UTMA? 

From my understanding, the 529 can grow tax free (awesome for compound interest), and if my son wanted to use the money for college, it would be tax free. But if he decided to not go to college and I didn't want to transfer to someone else, then it would have a 10% penalty and get taxed at his tax rate. would it make sense that the tax free growth of the 529 could make up for the lack of flexibility and fees?

Would love anyone else's thoughts or inputs for anyone who understands these accounts a little better than I do. 

@Scott Trench, you posted on a post of mine last year before he was born asking for general advice and I believe you mentioned the 529 does not look as good to you. Curious if you still hold that belief, and if you still think a custodial account is the way to go?

I am at the end of my 529 full cycle where I invested 100% of my kid education to finish his university at Computer Science major and he graduated this year.

529 is extremely flexible you could do for everything. He's literally has zero student loan debts while living local. The 529 is so flexible I would think it's more like free brokerage account LOL 
 

Don't overthink about it though, for me there's no option for kid has to pass beyond university graduate or even Master degree LOL

[Colleen F.]

@Chris Allen There is also some new legislation that will allow conversion of a 529 to a Roth IRA for the childs benefit apparently without penalty (except taxes) which will be helpful if your kids don't have kids and don't use the 529. It will be limited to $35,000. Obviously the roth rollover is taxable but when they have low income might be a good time to do it.

[Byron Valles]

One of the things I often tell clients regarding a 529 is that it's so flexible. You can change the beneficiary to what the IRS calls a "qualified individual" which means a member of the beneficiary's family. That includes:

• Spouse
• In-laws, including a mother-in-law, father-in-law, brother-in-law, or sister-in-law
• Children, including step-children, foster children, or adopted children
• Siblings, including step-siblings
• Nieces and nephews
• Aunts and uncles
• First cousins

It's also worth noting that there has been a strong legislation push for 529s recently. Colleen mentioned the Roth IRA rollover one and someone else mentioned the fact that you can now use funds for many more education-related expenses other than college tuition.

[Carlos Ptriawan]

529 is actually kinda set-and-forget-investment nonetheless almost like 401k with conservative portfolio. Average return was like 2-3% mostly money is invested into very conservative fixed-income strategies behind the screen.

[Colleen F.]

@Carlos Ptriawan  it is set it and forget it if you use age based investments but ours does have other funds available that are not age based. Doesn't do as well as stocks though although you can get index based funds.  

[Byron Valles]

There are many 529 plan options available. And as Colleen pointed out, some have more investment options than others. 

@Colleen F. what do you mean by "doesn't do as well as stocks"? if you don't mind me asking? 

I have clients with both UTMAs and 529 plans. The investment options available within each type of account are just one of the factors we consider when making a recommendation between the two. Other factors include a client's view on paying for their loved ones' education costs, their personal tax situation, and importantly, the time that the funds will be invested. 

[Byron Valles]

Quote from @Carlos Ptriawan:

Quote from @Chris Allen:

Hi all, I wanted to get some specific advice as I am planning for my sons (and future children's) future, and am trying to decide on what type of account to open for my son to start investing

I originally was drawn to opening a custodial account (UTMA) so I could have more flexibility in the investments I make through the account, as well as allowing him to use the money for whatever he wants without penalty. But when I look at the tax benefits of the 529, I wonder if this outweighs the flexibility of UTMA? 

From my understanding, the 529 can grow tax free (awesome for compound interest), and if my son wanted to use the money for college, it would be tax free. But if he decided to not go to college and I didn't want to transfer to someone else, then it would have a 10% penalty and get taxed at his tax rate. would it make sense that the tax free growth of the 529 could make up for the lack of flexibility and fees?

Would love anyone else's thoughts or inputs for anyone who understands these accounts a little better than I do. 

@Scott Trench, you posted on a post of mine last year before he was born asking for general advice and I believe you mentioned the 529 does not look as good to you. Curious if you still hold that belief, and if you still think a custodial account is the way to go?

I am at the end of my 529 full cycle where I invested 100% of my kid education to finish his university at Computer Science major and he graduated this year.

529 is extremely flexible you could do for everything. He's literally has zero student loan debts while living local. The 529 is so flexible I would think it's more like free brokerage account LOL 
 

Don't overthink about it though, for me there's no option for kid has to pass beyond university graduate or even Master degree LOL

 Congratulations on this huge accomplishment, Carlos! helping your loved one graduate with little or no debt is such a blessing, regardless of which type of vehicle we use to get there! 

[Colleen F.]

@Byron Valles  I was just referring to not having the advantage of individual stock portfolio choices. Its not going to be like your stock account or offer those returns/level of control. The choices are usually mutual funds of a relatively conservative type in my experience.  Age related funds get pretty conservative as your kids get older. You probably know more than me on this given your credentials depending on who you work for.   

[David M.]

@Colleen F.

Agreed.

I think its interesting that we have "stock investing" that is regulated to make sure that "safe" funds are available to the public.  So, the downside maybe limited, but so is the upside.

But, for real estate investing anyone can buy anything and take any risk.  The upsides and downsides are entirely open..