Sand Hill's Chief Investment Officer, Brenda Vingiello, CFA, joins Jenny Harrington on “Halftime Report” to go over their most recent portfolio moves. Brenda's commentary begins
Saving for Education: Are You Optimizing Your Child’s Custodial Account?
Published Date : November 18, 2013
As the buzz of activity surrounding schools and universities increases, we’re reminded of the planning required to effectively save for our children’s higher education. The options currently available to families interested in setting aside investments for higher education are primarily limited to custodial accounts and 529 plans. Over the last decade, 529 plans have evolved to provide tax, ownership and funding advantages not available to traditional custodial accounts. Recently, a hybrid 529 plan has been developed by many plan administrators to capture the tax advantages of a 529 plan while retaining the ownership structure of a custodial account. While a 529 plan remains the current optimal choice for saving for college in a tax exempt manner, the custodial 529 account is a relatively new option for parents who would like to optimize the tax treatment of an existing custodial account.
The traditional custodial account is a non-tax advantaged investment account that is officially owned by the minor, but under “custody” of the adult prior to the beneficiary reaching the age of majority. Upon reaching the age of majority, the beneficiary has complete control and authority over the assets and is not limited in any way on how the funds are to be directed. The 529 plan is an educational savings account that receives preferred federal tax treatment on qualified distributions used to pay for educational expenses such as tuition, fees, books, and related supplies. These plans are funded with after-tax contributions made into accounts that are invested in mutual funds whose growth is deferred from Federal and sometimes state taxes. Qualified withdrawals from the plan are eligible to be used toward any college, university, vocational school, or other postsecondary educational institution. While each state offers its own individual 529 plan, an account owner is free to participate in any state plan offered regardless of residence. A 529 plan is owned by an adult, who retains ownership for the life of the account and has the ability to choose and change the beneficiary over time.
An option worth reviewing is the transition of an existing custodial account to a custodial 529 account. The custodial 529 has all of the tax exempt attributes of a 529 plan with an ownership restriction that does not allow the parent to change the beneficiary while the child is a minor. Since the original custodial account is owned by the child, the parent or custodian does not have the right to give the child’s property to another beneficiary. There are two aspects of the original custodial account that may not warrant a transition to a custodial 529 plan. If an owner of a custodial account plans on using the funds for expenses other than education, then the tax advantage is lost and a 10% penalty will be placed on the earnings for a non qualified distribution. Also, if a custodial account is very small and annual income (interest, dividends and net capital gains) is less than $950 in 2014, then the tax exemption will be of no value since a child pays no tax on unearned income below $950. Finally, the funding of a custodial 529 plan must be in cash, so one should take into account the tax consequences of liquidating the original custodial account.
To determine if your specific custodial account is a good candidate for a transfer to a custodial 529 account, please contact your wealth manager to learn more.
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
Video Presentations
All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
Other Posts By This Author
- – Donor-Advised Funds Considerations to Help Accomplish Your Philanthropic Goals
- – The Importance of Segregated Assets at Brokerage Firms
- – New EV Tax Credits Require Planning to Glean the Largest Benefits
- – Can I Keep the Primary Home After Divorce?
Related Posts
Recent Posts
