There are ways to save significantly for your children’s college tuition, but in some cases they could end up paying taxes for that money set aside.
When my kids were in the first grade and pre-kindergarten, they began working for me. I paid them $5,000 a year (just under the amount to file a tax return).
The money they made each week went into a Florida Prepaid College Savings Plan, which allowed me to lock in the cost of tuition today for tomorrow’s education. It was a five-year commitment.
After their college was paid off, I put the money into a 529 plan that could be used for books, computers, and housing. For the Florida plan, the money coming out of it isn’t taxable. The same is true of the 529, provided that it is used for educational purposes.
Every state has its own 529 plan. Generally, in a 529, while the kids are young their portfolio is a little more aggressive.
As they get closer to going to school their portfolio is treated more conservatively. The money in the plan grows tax free and like I said, when they take the money out of the plan for educational expenses, it is not taxable.
In your lifetime, you can put up to $250,000 into a 529 plan without having to file a gift tax return. If you are self-employed, you should pay your kids a salary to make their college tax deductible.
Another way to save for college is through an irrevocable trust for your child. You can put, for example, $14,000 into the trust per year. If you are married and you and your spouse agree to gift splitting, your spouse can also put $14,000 into the trust per year, for a total of $28,000.
The problem with putting the funds into the trust is that any money that the trust earns is taxable to the beneficiary. However, if you know that your child isn’t going to college, this would be the best way to give your child money, while at the same time putting restrictions on how they can spend it.
College isn’t for everyone. Most parents, though, want to give their children something.
Personally, I don’t want to give my hard-earned money to my kids only to have them turn around and squander it all when they are 18 years old. I want control over that money.
The best way to do that is to put the money into a trust. In a trust, you can put any restriction that you want on the corpus of the trust. It is common to have a drug and alcohol provision in the trust.
You can also specify that your child can get 25 percent of the money when they are 25, then another 25 percent when they are 30, and the remainder when they are 35. Of course, this is just an example.
The only caveat to a trust is that usually the corpus of the trust is invested in something. Any money that is made on the investments is taxable to the beneficiary of the trust.
As you can see, there are several ways to give money to your kids and still control the use of the money.
Whether it be through college savings plans or an irrevocable trust, you are in control of your hard-earned money.