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Learning, Sharing, and Teaching => Investor Alley => Topic started by: JCGreen on November 24, 2019, 05:22:15 PM

Title: Type of savings/educational account for nieces (in USA)
Post by: JCGreen on November 24, 2019, 05:22:15 PM
Type of savings/educational account for nieces (in USA)

Situation: I am earning decent money, and would like to put some away for my two nieces. What is the most advantageous account (for the kids) to do this.   One niece is four years old, one niece is 6 months.

The 6 month old is my sisters first child. The four year old is my brother-in-laws child from a previous relationship. The mother has primary custody of her, but my sister is trying to get primary custody. I don't want the four year old's mother to have access to the money. Other than that I intend to treat both children equally.  I am also located in a different state than my sister and her children.

My sister and brother in-law are generally frugal with money (compared to general population), but also don't have a lot of it and haven't started an educational fund (529/coverdell)/IRA etc. for either child. I would be willing to give them the seed money to start one of these accounts if need be, but I am not sure what type of account to start. My sister doesn't know what type of account she would like either.

I was originally thinking an educational type account, but am also open to the possibility that they might not want to go to college, and an IRA or investment account might be more useful. That being said, my brother in law dropped out of college because his family couldn't afford it and I don't want that to be a problem for my nieces. I don't want to put an educational account in my name because of how it would effect financial aid, but could be convinced otherwise. All recommendations would be researched before implemented. I would also be willing to look at outside resources if anyone know of some good ones.

What type of account would you recommend?
Title: Re: Type of savings/educational account for nieces (in USA)
Post by: brooklynmoney on November 30, 2019, 12:27:15 PM
For my niece, I set up a 529 in her name. There are implications for her for financial aid that you would need to research. In my state I get a tax benefit for contributions up to 5k. I donít think thatís true of every state. I figure if she doesnít use the money I will just take the penalty and withdraw the me it myself. My niece is 6 and Iíve had the account almost since she was born.
Title: Re: Type of savings/educational account for nieces (in USA)
Post by: seattlecyclone on November 30, 2019, 01:55:48 PM
I was originally thinking an educational type account, but am also open to the possibility that they might not want to go to college, and an IRA or investment account might be more useful.

You can't do an IRA until they have earned income of their own. The main options you'll want to look into are a 529 and an UTMA account. The UTMA is basically a taxable investment account where you get to control the investment choices until they reach the age of majority (depends on the state, usually 18 or 21). After that they have full legal control over it.

In general, the 529 will prove to be better for taxes and financial aid if they go to college and the UTMA will be better if they don't.

You're right that a 529 where you're the owner will be treated differently for financial aid than one where the parents are the registered owner. For one where the parents are the owner, it counts as an asset in their name but the withdrawals aren't considered income. For one where you (or another non-parent relative) are the owner, nobody has to report it as an asset, but the withdrawals have to be reported as income to the student on the FAFSA. For this reason it's often more advantageous to let a non-parental 529 sit untouched until the student is in their last year or two of schooling and won't have to report the current year's income on a future FAFSA.
Title: Re: Type of savings/educational account for nieces (in USA)
Post by: JCGreen on December 01, 2019, 10:16:42 PM
Thanks for bringing up the UTMA. I hadn't considered that. I will say that I am leaning towards the 529, just so college will be an easier cost to bear, but (the nieces) can still use the money (and take a large penalty) if they decide not to go. It also depends on what I can convince my sister to open up.

I was thinking that if the 529 was in my sisters name, it would be harder for the account to be mis-used. (In case of drug use, or other outside influences).