Parents and grandparents looking for ways to create a financial pathway for the children in their lives have many options. The three listed below are the most popular ways to help a child invest for the future.
If the goal is to help fund the child's college education, most parents choose a 529 plan. While a 529 plan originally was exclusive to college savings, it was later expanded to K–12 as well. To learn more about the plans available in your state, visit SavingforCollege.com.
Structure: These investment vehicles, named after section 529 of the Internal Revenue Code, allow money to be invested over a period of years and then withdrawn to pay for tuition, books, supplies, equipment and, in some cases, room and board for a student studying at an accredited university or vocational school.
Tax status: Earnings on a 529 plan grow tax-deferred, and distributions are not subject to federal income taxes. The account assets are transferrable to other students within the same family, but the uses are limited to educational expenses. While contributions are not deductible on your federal return, some states allow you to deduct contributions on your state income taxes. Please consult with a tax advisor regarding your specific situation.
Contribution details: Adults can contribute up to $15,000 per person, gift-tax-free, to a child's 529 plan each year. There's no limit on the number of people who can contribute a gift to a child's account; however, each state's 529 plan has an overall cap on contributions. Most 529 plans allow for an accelerated contribution in which an adult makes five times the maximum allowed before gift taxes in one year, while limiting additional amounts for the next five years without incurring gift taxes. While most 529 plans are funded by parents and grandparents, working teenagers can also add to their accounts. Most family members do not contribute more than is necessary to a 529 plan because only the money withdrawn to pay for educational expenses is tax-free.
Good to know: The account assets are transferrable to multiple students within the same family, but the uses are limited to educational expenses.
Another type of 529 plan, prepaid tuition plans are the newest of the college preparation accounts, arriving on the scene in the 1990s. Unlike education savings, this plan is not eligible for K–12.
Structure: Contributions purchase college credits at today's price. Those credits are cashed in when the child attends a university in the state where the prepaid tuition was purchased. Some plans require that the money invested be used for tuition in the state where the account is registered, while others make allowances for the tuition credits to be transferred to an out-of-state college.
Tax status: Gains on funds deposited into a prepaid plan are exempt from federal income taxes. Most prepaid tuition plans are administered through a vendor chosen by the state government.
Contribution details: Because tuition varies from state to state, each plan has its own unique method of calculating contributions. Details are available from your state's plan sponsor. You may also view the plans available in your state at SavingforCollege.com.
Good to know: The plans have evolved during their lifetime; some no longer guarantee full tuition, and a few have closed their plans to new participants.
Parents, grandparents or anyone who wants to get a child started on the right financial foot can open an investment account in the child's name.
Structure: These accounts are known by their acronyms UTMA/UGMA (Uniform Transfers to Minors Act/Uniform Gifts to Minors Act). An adult custodian must be appointed to oversee the administration of the account until the child reaches the age of majority, either 18 or 21, which is determined by the state where he or she resides. When the child reaches the age of majority, he or she receives control of the funds in the account.
Tax status: Tax on a child's investment and other unearned income (Kiddie Tax) reverted to the old rules with the passage of the Secure Act. The Secure Act retroactively repeals the TCJA Kiddie Tax rate change for all children and young adults and reinstates the pre-TCJA Kiddie Tax calculation so that it's once again based on the parent(s)' marginal tax rate.1
| Earnings | How taxes are calculated |
|---|---|
| First $2,200 | The first $2,200 in earnings are tax-free. |
| Anything more than $2,200 | All earnings over $2,200 are taxed at the parent's tax rate. |
Contribution details: Adults can contribute up to $15,000 per person, gift-tax-free, to a child's UTMA/UGMA, and there's no limit on the number of people who can contribute a gift to a child's account. Some parents help children learn about investing by encouraging them to make contributions to their own accounts and watch the results.
Good to know: A UTMA/UGMA offers tremendous flexibility with the fewest restrictions. The money can be used for college, a first car, a wedding, a down payment on a house or a mission trip.
If you're ready to create a financial pathway for the next generation by opening an investment account, GuideStone® is here to help.
Retail products are made available through GuideStone Financial Services®, member FINRA. For more information about the firm, products and services please review the GuideStone Affiliate Form CRS and visit FINRA's Broker Check.
Article 