With housing and higher education costs increasing each year, many American families consider ways to best position their children or grandchildren financially. Investing money in the market through a portfolio of stocks is one avenue to help children or grandchildren gain a financial edge when planning for big-ticket items such as tuition costs. Many parents and grandparents want to know how to buy stock for their child or grandchild.
The answer is usually by opening a custodial account for your child or grandchild. These accounts allow parents and grandparents to exercise a degree of control over the funds in the account until the minor reaches a specific age. Yet, there are alternatives to opening a stock portfolio for your child or grandchild. A 529 plan is one of these alternatives: a savings account aimed directly at easing the financial burden of education for American families.
The financial experts at Sootchy can provide you with everything you need to know about setting up a college fund for your baby and why they might be the best option for your family. To learn more about 529 plans, keep reading or download our app.
Using a Custodial Account to Buy Stock for My Child or Grandchild
When parents or grandparents want to buy stock for their child or grandchild, they generally open a custodial savings account. Custodial savings accounts are set up to allow an adult to control the account until the minor reaches the age of 18 or 21, depending on the state. These accounts are administered by brokerage firms, financial institutions, and mutual fund companies. Moreover, financial professionals manage the money invested but at the discretion of the account holder. In other words, parents and grandparents must grant approval before a firm can sell or buy stocks. Custodial accounts are offered in two forms:
Uniform Transfers to Minors Act Accounts
A Uniform Transfers to Minors Act Account, or UTMA, is a custodial account that permits parents and grandparents to give nearly any type of asset to a minor. This means that UTMAs can contain many assets such as stocks, patents, art, royalties, and real estate. Essentially, a UTMA functions as a tax-advantaged way for parents and grandparents to pass on assets to minors. These accounts allow for tax-free growth of funds for a minor to accrue until the child reaches legal age, depending upon the state.
Uniform Gift to Minors Act Accounts
Much like a UTMA, a Uniform Gift to Minors Act Account (UGMA) is a custodial account that allows parents and grandparents to transfer assets to minor beneficiaries. Unlike a UTMA, UGMAs are used strictly for financial instruments such as mutual funds, bonds, stocks, cash, or other securitized instruments. In other words, while a UTMA account allows parents and grandparents to transfer any form of property, a UGMA account must stick to financial securities. Other than that, UGMAs function much in the vein of a UTMA. Parents or grandparents open an account with a financial firm, and invested money is managed by a financial professional. Additionally, UGMAs are subject to the same tax advantages as a UTMA regarding tax-free growth on beneficiaries’ funds.
The Disadvantages of Using a UTMA or UGMA to Buy Stock for My Child or Grandchild
Although popular, both UTMAs and UGMAs do present families with potential disadvantages should they choose to open an account. For instance, if a family is saving for future higher education costs, UTMAs and UGMAs are far more prohibitive when it comes to applying for financial aid. This is because these accounts are classified as student assets, meaning that FAFSA takes them under consideration when giving out financial aid. According to experts, a UGMA or UTMA is “weighted 20%” when examining a FAFSA. This means that students will be expected to use a UGMA or UTMA to finance 20% of their higher education costs, thereby reducing the amount of financial received.
Another disadvantage of UGMAs and UTMAs is that they are not the best financial vehicles for saving for higher education. UGMAs and UTMAs are subject to taxes for unearned income, meaning that only the first $1,050 is tax-free if the beneficiary’s sole income is from a UGMA or UTMA. The next $1,050 will be taxed at 10%, generally the child’s rate. Any unearned income above the first $2,100 will be taxed at parents’ or grandparent’s rate. These restrictions provide little incentive for using these types of custodial accounts to save for higher education.
Using a 529 Plan to Save for Higher Education
If you want to invest in stocks for your child or grandchild, you should consider opening a 529 plan. 529 plans are “tax-advantaged savings plans” that support families saving for future higher education costs. 529 plans are offered in two forms. The first is a 529 pre-paid tuition plan which allows the account holder to pay toward future tuition costs at current prices. Alternatively, a 529 savings plan operates as a true low-risk investment account subject to market forces. 529 savings plans can be used to finance up to $10,000 per year per beneficiary at eligible higher learning institutions. Both versions offer users tax-free growth after an initial investment.
Additionally, when applying for financial aid, 529 plan assets are weighted only 5% by FAFSA, increasing the amount of potential financial offered. 529 savings plans also provide steady growth of 6% or more, offering you a chance to double your investment by the time your child or grandchild is ready to enroll in college. Moreover, 529 savings plans offer the account holder the choice to change their investment options twice a year. Also, 529 plans allow the account holder to stay in control even after the beneficiary has reached legal age. This ensures that you can direct the funds to be used as they are intended.
Download Our App To Start Saving For Your Child’s Tuition
When it comes to paying for your child’s college tuition, buying stocks might seem like the best option. The college savings experts at Sootchy specialize in providing families with everything they need to make an informed decision, and the Sootchy app makes it easier than ever to start saving and receiving gifts.
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