I have decided to dedicate every Tuesday's blog to Q&A. I will try and post the most common types of questions I receive. Please e-mail us if you have a question you would like to ask.
Q: Whose name should I put my child's college savings under? Mine or theirs?
A: There are advantages and disadvantages to both. Generally speaking, the disadvantages of having the money in your child's name outweigh the advantages though.
One, there will be a kiddie tax levied on earnings in excess of $1,700 if the funds are not in a tax advantaged vehicle. The first $850 is exempt from taxes, the second $850 will be taxed at the child's rate with the remaining earnings taxed at the parents highest tax rate.
Two, there are control issues involved. If a custodial account is set up for the child via UGMA or UTMA the child will often times gain complete control of it once they reach the age of majority (usually 18 - 21). The money will be theirs, whether they choose to use it on education or not.
Third, and perhaps most important, is the impact the type of saving will have on the expected family contribution for financial aid purposes. Assets in the child's name are assessed at 20% while the parent's assets are assessed at a rate of 5.6%. Consequently, this can result in a significant difference in the amount of financial aid the child qualifies for.
The above is not intended as financial, legal or tax advice. You should see a competent professional if you have questions about your specific situation.
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