Money Talk: College Board Calculator Can Help Figure Aid, Costs
Question: My in-laws have gifted stock to our children through the Uniform Transfers to Minors Act, or UTMA, to help pay future college expenses. The value of the stock has increased significantly over the past few years.
We would like to sell the shares and move the proceeds into more stable investments for our children. What are our options for those funds? Do you recommend one option over another? I don’t expect them to get much need-based financial aid.
Our household income is approximately $95,000 a year. We have 529 plans for each of our three children and each account currently has $6,000 to $9,000.
Answer: If you have only one child in college at a time, then you’re right that you probably won’t get much need-based aid.
If, however, your kids are close enough in age that more than one will attending college simultaneously, you may qualify for more help than you think. One way to find out is to use the EFC Calculator at the College Board website, which can give you an estimate of the amount your family is expected to contribute to higher education costs.
If your kids may get need-based financial aid, then they probably shouldn’t have money in UTMA or other custodial accounts. UTMA accounts and their predecessor, Uniform Gift to Minors Act or UGMA accounts, used to be a good way to save on taxes, but changes to the so-called “kiddie tax” rules have made them less appealing.
Income from the accounts above $2,000 a year for children under 19 and full-time college students under 24 is now taxed at the parent’s rate. What’s more, these custodial accounts count heavily against families in financial aid calculations.
Often it’s best to spend down the money by the child’s junior year in high school (by paying for tutoring, a laptop, private school or other expenses that benefit the child.) Another option is to transfer the proceeds to a 529 college savings plan, since these state-run investment accounts typically are viewed favorably in financial aid formulas. What’s more, the plans offer professional management and diversified portfolios known as “age-weighted” options that grow more conservative as a child approaches college age.
You’ll want to talk to a tax pro about what makes sense in your specific situation, especially since selling the shares all at once may trigger a big tax bill.
Question: Regarding your recent column advising recent college grads to keep living like students: I helped my three children do just that. I had them live at home rent-free for six months after graduation and told them to save money like crazy.
Then, when they rented an apartment, they would have the rental deposit saved as well as money for utilities, food and so on. I taught them to cook simple nutritional meals. We had already given each kid a car senior year and covered the insurance. I took home equity lines of credit to pay college tuitions, room and board, so they had no debts and six months to transition to serious responsibilities.
Answer: You’ve given your children a good head start in life at a time when so many others are starting out deeply in debt. Hopefully you didn’t do so at the expense of your own finances.
Home equity lines of credit may seem like cheap money, but the rates are variable and could spike if interest rates rise. If the debt is relatively small and can be paid off in a few years, that’s one thing.
If the debt is large and you can’t pay it off quickly, though, you may have put your home (and your retirement) at risk.
Question: If I retire at 66 but don’t collect my Social Security until 70, will my benefit increase or stay the same since I wouldn’t be working? I can’t find this answer anywhere! Thanks so much.
Answer: Your benefit will increase 8 percent each year you put off starting benefits between your full retirement age (currently 66, but rising to 67) and age 70. You get those “delayed retirement credits” whether or not you continue working.
Many people erroneously think the two decisions — when to quit work and when to start Social Security — have to be linked. In fact, they can be entirely separate.
You can retire years before you start Social Security and vice versa. Given the built-in benefit increase for waiting to begin Social Security checks, it often makes sense to tap other retirement money if you can while you wait for your check to max out.
Liz Weston is the author of The 10 Commandments of Money: Survive and Thrive in the New Economy . Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, Calif. 91604, or by email at email@example.com. Distributed by No More Red Inc.