A couple of weeks ago, I brought to light the rather astounding cost of sending my child off to college in 18 years. To recapitulate, the average tuition increase for public universities is 6% per year compared to the current rate of inflation at 2.42%. Doing some basic math (or using an ), this comes out to roughly $170,000 for a 4 year education. In that article, I brought up a couple of options for college savings. For the sake of research, I have decided to look into and compare UGMA/UTMA accounts to the aforementioned 529 Plan.

Let's begin with a rehash of what a 529 Plan is. Per wikipedia, a 529 Plan is described as an "..investment vehicle designed to encourage saving for the future higher education expenses of a designated beneficiary". There are two distinct types of 529 Plans.

1. A 529 "prepaid" plan. This allows a person to buy tuition credits at "today's cost". These credits are in turn used in the future to pay for education expenses. Texas had/has a plan, called the "Texas Tomorrow Fund", that allows this. Unfortunately, as of today, enrollement for this fund is closed.
2. A 529 "savings" plan. This savings plan is contributed to and in turn, with market performance, returns interest to the account. What makes this account different from a regular investment account is that earnings on the account are not charged capital gains tax. The downside is that since this is based on market performance, the 8% return we need to realize our roughly $170,000 is not guaranteed. Although, if we are lucky, it could be significantly higher. Though this is doubtful due to the rather conservative nature of the fund's investments. I don't want some schmuck investor get risky with my kids college fund!

Alternatively, there exists a different type of "savings" account for use with higher education expenses. Commonly lumped together, the "Uniform Gift to Minors Act" and "Uniform Transfers to Minors Act" are not actually savings plans, but rather a set of laws drafted to allow for gifts (money) to be "made to a minor without requiring the presence of an appointed guardian for the minor". Of note, the UTMA is actually an extension of the UGMA.

Now, on to the nitty/gritty. UGMA/UTMA or "Custodial Accounts" only allow for $12K/year ($24K/year per couple) to be counted towards tax credits. Meaning that if you got a whopping $50K bonus that year and wanted to contribute all of it to your child's "Custodial Account", $26K of it would still be taxable. Contrary to the 529 Plan which the contributions are $60K/year or $120K/year per couple.

Another kicker is that with the "Custodial Account", only part of the earnings may be tax-exempt. Meaning you might still have to pay capital gains tax on a portion of it.

Doing a direct comparison, it really looks like the only benefit of the UGMA/UTMA "Custodial Account" is that of use. When the benficiary turns 18 or 21 (depending on State of residence), they are awarded the money and can use it as they see fit. This wound up being the proverbial "straw", as Sherri and I will be using the money as a reward, rather than a "free gift".

As for us, we have decided to stick with the plan outlined in the original article. We will be contributing $200/month into an INGDirect "Orange" savings account with APY of 4.5%. After 18 years, this will leave us with roughly $68,000, of which $23,700 of it will be earned interest. As well, we will be contributing $350/month to a 520 Plan "savings" account. Provided we get an annual return of 8% on that money, after 18 years we will have the $170,000 it will take to send Liam to school.

I sincerely hope this helps summarize some of the options available when making the not-so easy decision to invest in college fund(s).

For Now,
-M