Welcome to Dear Financial Advisor - where we simplify some of your most complicated personal financial questions.
My name is Evan Vladem and I’m a partner and financial advisor at Associated Investor Services. I get it... talking about money can be intimidating... So, we created a judgement-free space where there are no "dumb" questions or embarrassing situations.
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My husband and I recently welcomed our first child into the world. The future (and expenses) are already on our minds!
We want to make sure we're doing everything we can to provide for our child, including setting aside money for their education and other expenses down the road.
My husband earns a higher income than I do but I also work full-time and contribute to our finances. We've been considering a 529 plan or a UTMA/UGMA account, but we're not sure which option is best for us. Can you help us understand each?
We have a small amount of disposable income each month, but we're not sure how much we should be setting aside for our child's future. We want to strike a balance between saving enough to provide for our child and still being able to enjoy our lives in the present. Our parents have expressed interest in contributing to our child's future as well. However, they also believe in the importance of us being as independent and are hesitant to simply give us money without having a clear plan in place. Any advice you can offer would be greatly appreciated.
-Brand New Mommy
Dear New Parents,
Congratulations on your new bundle of joy! Hopefully you’re making the most out of those sleepless nights. It's great that you're thinking ahead and want to make sure you're doing everything you can to provide for your child.
First, let's talk about the difference between a 529 plan and a UTMA/UGMA account. A 529 plan is specifically designed to save for education expenses, and contributions grow tax-free (and pulled down tax-free) as long as the funds are used for qualified education expenses. It's not only college, 529s can be utilized from grades K-12 (up to a $10K limit per year) and for graduate school or specialized training, such as medical or law school, or other graduate programs at eligible institutions.
On the other hand, a UTMA/UGMA account can be used for any purpose with a portion generally taxable, but the funds become the property of the child once they reach the age of majority (usually 18 or 21 depending on the state). This means that the child can use the funds for anything they want, not just education expenses. Think of future house, car, wedding or any of their future needs, goals or wants.
Given your situation and the fact that you're looking to save for your child's education, a 529 plan may be the better option for you. However, it's important to keep in mind that there are contribution limits and restrictions on how the funds can be used. American Funds provides some great resources right HERE.
Finally, regarding your parents' desire to contribute, it's great that they want to support your child's future. You could consider setting up a 529 plan and inviting them to contribute to it (which is acceptable, anybody can contribute) or creating a separate account specifically for their contributions. It's also important to have a clear plan in place for how the funds will be used and to make sure everyone is on the same page to avoid any misunderstandings or conflicts down the road.
Best of luck! Enjoy these moments because they will go quick!