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College and Adult Planning – the 1000 Foot View

You are thinking about having kids in a few years. Is it too late to start planning for their college education? That’s actually not an extreme exaggeration of the anxiety we hear from young families when it comes to saving for their children’s future. And it’s not just about higher education. We like to think of this whole process not just in terms of college, but as Adult Planning. With that in mind, we wanted to take a deep dive into the tools you have at your disposal to take some of the anxiety out of the equation as you prepare your children for financial independence.

We’re starting here with an overview, but there will be plenty more details to come on each subject we touch on here. In broad strokes, there are savings strategies and there are investment strategies. So, in the list of 6 strategies that follow, the first two are savings and then the rest are investment strategies. Let’s take a closer look.

1. Budgeting

When should you start introducing kids to the concept of budgeting? As soon as possible. A budget that is simple for younger kids to understand includes 4 categories: Save, Spend, Give, and Invest. Let’s say you give them $5 for allowance. Budgeting means they might save $1, give $1, invest $1 and spend $2. Then as time goes on, you can help them see what is happening in the envelopes, bank accounts, their wallet or piggy bank. Budgeting is showing them how to drop the $1 in the basket at church, or how to go to the bank and deposit the $1.

Taking things to the next level, we are huge advocates of Qube Money and the ability to do qube cards for your kids. It’s an app and card that gives them the ability to save, invest, and budget as well as spend all from one interface.

2. Uncommon Banking for Kids

Our Uncommon Banking approach is basically a way to leverage the cash value along with the other benefits of a whole life insurance policy. Uncommon Banking for kids is about four key principles, especially important for those of us who are entrepreneurs and business owners. First, locking in insurability. You want to get life insurance when you qualify.

Second, comes savings. Uncommon Banking is a way to put your money in an instrument where it gains a decent return, but also where the cash value is accessible. The third principle is growth. For example, if you establish a policy at age 0-5 years old, it can potentially grow 3-5 times the premium by age 30. Fourth, this is a way to manage the economic impact of grave illness. With the policy, you can take half the death benefit tax-free to use for any care you deem necessary to fight and treat the diagnosis and or supplement your income for bills and cash-flow.

3. 529’s

529 plans are popular because they allow you to invest for college and offer three layers of tax protection. First, you as the custodian or donor receive a state tax deduction as most states participate with a 529 plan and incentive. Vanguard has a tool that allows you to look up the specific rules for your state regarding 529 tax incentives. Second, the money grows tax-deferred as it goes up in value leading up to college. And lastly, the money can be withdrawn tax-free for qualified 529 withdrawal rules. That is very powerful.

The major disadvantages are that the money can really only be used to benefit one child or person annually for an accredited university and associated expenses. Most states only offer one or two companies to work with for the investments and limit you mainly to mutual funds.

4. UGMA/UTMA

The Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) are custodial accounts used to hold and protect assets for minors. We really like these accounts because they are an open brokerage account where you can invest in really anything that broker allows like stocks, ETF’s and or sector ETF’s. This is a great account structure to start teaching children about the stores they shop in and how to invest in those directly. Taxes will be assessed under the child’s social security number since these are technically their property.

5. Coverdell ESA

We are not fans of this, but it is an instrument people use. The Coverdell Education Savings Account (ESA) is a trust or custodial account set up solely for paying qualified education expenses for the designated beneficiary of the account. This benefit applies not only to qualified higher education expenses but also to qualified elementary and secondary education expenses. Our biggest concern with this is, what if the kid doesn’t want to go to college? If everyone involved is positive about college, here are the main requirements:

  • When the account is established, the designated beneficiary must be under the age of 18 or be a special needs beneficiary.
  • The account must be designated as a Coverdell ESA when it is created.

6. Minor Traditional or Roth IRA

Setting up an IRA in your child’s name is another investment option. And here’s a neat and totally legal trick: As business owners, you can pay your kids and can potentially defer their entire paycheck into an IRA or Roth IRA in their name. These account structures allow for tax-free withdrawals based on education expenses like tuition, fees, books, supplies, and equipment (including laptops or notebooks) needed for education beyond high school. And although capped at a certain level, room and board also qualify if the student is attending at least half-time.

So, when it comes to helping your kids after high school – don’t panic. You have many options when it comes to helping your children thrive. And whether they choose college or another path, you can share the tools and resources you’ve been learning at the School of Life. In the following posts, we’ll take a closer look at each of these savings and investment tools, so stay tuned for a deeper dive into each.