College Savings: Trust funds, UTMA's or 529 plans

College tuition goes up quicker than inflation.  

There are college loans for all, federal grants and aid for some, and scholarships for those who seek. 

Suze Orman has said time and time again that parents should fund their retirement accounts over saving for their kids college.

As per Suze Orman:

Yes, your kids should go to school. No, you shouldn't bankroll their degree whatever the cost. You've spent your life creating a sound financial plan; don't upend it by suspending your retirement savings or taking out a home equity line of credit to pay for a pricey college. Instead, consider a financial safety school that's likely to offer your family a generous scholarship package. If you opt for a more expensive school, have your kids borrow fixed-rate federal loans, which you can supplement with federal PLUS loans; take out only as much as you can afford to pay off before you stop working.

http://www.huffingtonpost.com/2013/02/27/saving-money-suze-orman-financial-advice_n_2678297.html

Kids are so cute and you just want to fund them.  Personally, I opened 529 plans for my children because of the simplicity.  

When I went to undergrad I relied on my parents, loans and a MAAP scholarship to attend the State University at Buffalo.  

For my first Master's at New York University I was fortunate to be a John Hopkins research assistance.  I tutored children in reading with the Success for All reading program.  I worked in Harlem and the Bronx in public schools and received 9 credits per semester and a stipend.  I took out minimal loans to complete my Early Childhood and Elementary Education degree.

I remember one of my NYU classmates telling me she was using the last of her trust fund to pay for her NYU Masters.  The trust fund also paid for her undergrad.  A trust fund baby is common at NYU.  What was interesting to me at that time was that she was African-American.  That was a new concept to me.  My family and friends were well educated but not well funded.  But this is what inspired me to help my future children through college.

I was very fortunate because my second Master's was funded by my employer.  I was promoted to supervise at a preschool for children with special needs and I needed an Education Administration certification to supervise.  My job would pay up to CUNY rates.  I went to CITE College of Saint Rose and received my last degree in 2007.  The rate was about $900 per 3 credits.  

In the end I am still very educated and unfunded.  :-) But I digress.

 

Here are three options for saving for your childs' college education:

Trusts - This is set up by an lawyer and it allows the trustee (funder/parent) to create their own terms.  A parent decides the payout meaning at what age and how the money is distributed.  It is expensive to set up but it is an excellent way to preserve wealth.  It is not only for the rich, the middle class do it as well.

http://www.legalzoom.com/living-trusts/living-trusts-overview.html


Uniform Transfer to Minors Act (UTMA) -  UTMAs are opened much like an individual bank or investment account, except for the fact that an adult custodian needs to be on the account until the child reaches age of majority (21 in many states including Washington).

https://www.bankofamerica.com/deposits/savings/utma-savings-account-for-children.go

529 Plans - An advantage of this type of account is that it's tax-free. Established exclusively for college costs, 529s grow tax-deferred AND receive tax-free treatment on withdrawal if you use them for qualified education expenses.   What if the little genius doesn't go to college, the funds are subject to taxes on growth and a 10% penalty. Although not ideal, at least the account was able to grow tax-deferred for many years.

https://www.nysaves.org

	Trusts	UTMAs	529 Plans
Set up	A legal trust document and account opening	Application and account opening	Application and account opening
Costs	Legal fees and ongoing administration and investment costs	Little to no set up costs, ongoing maintenance / investment costs depending on financial institution	Typically maintenance, administration and investment costs
Control	"Trustee" has control (parent should not be trustee) and corporate trustee is recommended	"Custodian" can be parent, although that would include the accounts in your estate	"Owner" can be parent and account would not be included in estate
Investment Choices	Flexible	Flexible	Limited to options in particular state plan
Age of distribution	Flexible as you can designate age of distribution in trust document	21 in Washington state (there is an "age 25 UTMA" option	No set age, but qualified distribution only for enrolled student.
Tax benefits	No	"Kiddie" tax	Yes, grows tax free and distributions tax free if used for qualified expenses
Distribution terms **** The links on this blog are for information purposes only.  I am not endorsing any of them.	Determined by trust document, can provide a flexible definition for "education"	Limited for custodian to withdraw funds for the child's costs, but once the child is over 21 can use for anything they desire	Qualified education expenses include tuition, room, board, fees, books