Giving Your Children Every Opportunity or Your Financial Independence

Last month, my colleagues Easton and Raylynn discussed funding children’s college education and planning for your retirement. They highlighted saving early for college and knowing how much and where to save. They ended with the reminder to Plan for You First. 

Planning for me first feels counter intuitive as a parent. With my first baby, it felt like everyone was reminding me to start saving for college for the baby. It made sense to me:  get my little one started on the right foot even though I had not yet seen that right foot.  

Most parents share that excitement of planning for their child’s future. The 529 and other custodial accounts are opened, and deposits begin accumulating over time. And here is where I drop in caution. How do you balance “Plan for You First” and saving for your child’s future?  

First, consider the following: 

1. Be Selfish. Yes, selfish can be an ugly word and not typically one we would focus on in the world of parenting. Review your retirement and financial independence plan. If your child(ren)’s education costs fit into the current savings level you have chosen in your plan, then you can move forward with saving towards that goal.
   
   
2. Do not give your money away. When you save and invest money in a 529 and other custodial accounts, you are gifting money. You control this money, but it is for the benefit of the account beneficiary (your child).  While you can get back the 529 account monies by changing beneficiaries, the tax benefits are based on these funds only being used for higher education.1 If the money in a 529 account is used to pay for education for the beneficiary, then the earnings from the investments in that account are tax free.
   
   You can save and invest the funds in your name. This allows you the flexibility to keep the funds for your use in your retirement or for your child(ren)’s education. What you give up for this flexibility is the tax-free earnings on the investment. You can work with your investment advisor for tax efficiency to have your investment income taxed at long term capital gains rates, as opposed to the more expensive ordinary income and/or short-term capital gains rates. 
   
   We could turn this upside down to focus on saving all you can in a 529 account. However, the earnings used for non-education purposes will be taxed at your ordinary income tax rate PLUS a 10% penalty.
   
   
3. Plan with your child(ren) not just for them. In planning for your retirement and college educations, you may not be able to fund everything. If you have prioritized retirement as primary and education as secondary, you likely must make hard decisions. Your financial planner can walk you through balancing the saving strategies.
   
   High school is an excellent time and age for your child(ren) to understand and discuss the financial impact of college spending. This allows for joint decisions on withdrawals, savings, loans, scholarships, grants, and maybe even gifts for other family members.  
   
   
4. Use 529 accounts for gifts. Encourage family and friends to contribute money to the 529 account(s) for your child(ren) for birthdays, holidays, and life event celebrations. A contribution to a 529 account for a one-year old’s birthday will have much greater impact than another plastic toy.  

There is truly no one size fits all solution here. The sooner you take a realistic look at your retirement balanced with funding education goals, the sooner you can make the hard decisions. Everyone deserves the opportunity to retire.  

 Resources: 

https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan 

 Disclosures: 

 Apella Capital, LLC (“Apella”), DBA Apella Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment-related content made reference to directly or indirectly in this material will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may not be reflective of current opinions or positions. Please note the material is provided for educational and background use only. Diversification seeks to improve performance by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market. Past performance does not guarantee future results. All data is from sources believed to be reliable but cannot be guaranteed or warranted. 

No current or future client should assume that any discussion or information contained in this material serves as the receipt of, or as a substitute for, personalized investment advice. As with any investment strategy, there is the possibility of profitability as well as loss. 

Apella Wealth does not provide insurance services or legal advice and nothing either stated or implied here should be inferred as providing such advice. 

The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Apella Wealth does not provide legal or tax advice. Apella Wealth cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Apella Wealth makes no warranties with regard to such information or results obtained from its use. Apella Wealth disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.