Archive for College Planning

Ugh! UTMAs and UGMAs

I’m not sure why anyone has these accounts anymore, but they do. I mostly see them during divorces, where one spouse has tried to transfer money to the kids in hopes of keeping it out of the divorce joint property. Technically, these accounts are considered property of the children (not marital), but as with so many other financial issues, it’s largely up to what the attorneys are able to negotiate.

Funding these accounts is a pretty poor idea in most cases, however. What you’re doing is putting all the money in the kid’s name: they’re entitled to it at 18 to do whatever they want with it, and all the earnings are taxed at the parents’ rate. It used to be that as long as earnings stayed below a certain amount, the earnings were taxed at the kid’s rate so it was once a decent strategy to avoid some tax, as long as you could trust your kid not to burn through it by the time they were 18 and two months.

That tax dodge evaporated years ago, but somehow these accounts are still hanging around. Unless you’re trying to shaft your spouse, or have a child actor who’s earned the money themselves but needs some supervision, I don’t think there are many good reasons to have such an account.  They’re considered 100% the property of the child for college financial aid determinations, also.

How can you get the money out of it? The account has to be used for the benefit of the child (once funded, it’s their money), but as long as you can prove that’s how you used it, you’re fine. You’ll have to pay taxes on any gains from the sale of investments, but it’s unlikely the IRS will check up on how the money itself was spent—it’s your kid that could sue you, and hopefully that won’t be a factor.

Once upon a time I had such an account for my daughter, when the taxation was still favorable. I liked it way back then because there was no obligation to spend it on college, and I was certain my brilliant kid would get a full ride scholarship. Ha-ha. Obviously that was before I was a financial planner. We never did accumulate much in college savings in the account, being dunderheads at the time, and I eventually cashed it in to purchase her harp. She hasn’t sued me yet.

Probably the easiest way to clean out the account, besides covering tuition, music lessons, instruments, sports equipment, computers…is to move the money into a 529 plan. If you have significant gains, you’ll have to pay taxes (now playing world’s smallest violin) because 529 deposits have to be in cash. At least the (new) investment will be growing tax free.

If your child has actual earned income, you can also deposit some of the funds into a Roth IRA (up to $5,500/year depending on their earned income). They can withdraw money for college with no early withdrawal penalty, but they will need to pay taxes on any earnings withdrawn. Although they own the account once they’re adults, the tax and withdrawal penalties may slow them up a little. Also, $10,000 can be used as a down payment on a first time home purchase.

For some odd reason, most of these lingering UTMAs are also invested in savings accounts, where they’re earning practically zero for years now. I think they’re just places where people thought they were going to park some cash for college, then mostly forgot about them.  So, if you still have these accounts, resurrect them and put them to work for your kids. College is going to take whatever you can scrape together.

In case you’re wondering what these letters stand for, UTMA is Uniform Transfer to Minors Act and UGMA is Uniform Gift.

Financial planning, James Comey, and the least bad alternative

Not to decide is to decide

-Harvey Cox

I’ve been fascinated to listen to James Comey describe his decision process on the interviews with George Stephanopoulos and Stephen Colbert. When discussing his decisions surrounding the Hillary Clinton email revelations and retractions, he is adamant that there were no good options and he believes he chose the least bad alternative.

As always, it depends on what standards you use, what time period you’re talking about, and where your loyalties rest. Here’s where I think Comey went wrong—he seems to have considered the least bad alternative for the reputation of the FBI, not the country. I haven’t read the book (although I intend to) but am just gleaning his statements at the moment. However, who among us hasn’t made decisions by what we thought was true at the time and then found, to our horror, that the consequences were completely different? That describes an awful lot of marriages that end in divorce. (He believed Clinton had a significant lead and although he knew his revelations might hurt her, he didn’t seem to think he would turn an election).

Let’s take a frequent example where we’re faced with all bad alternatives: you haven’t saved any, or enough, money to put your kid through college and they get into a great one with no, or inadequate, financial aid. Do you drain your 401k, co-sign a loan, or tell the kid they’re not going to that college? For a lot of parents, out comes the pen (or they drain the 401k). So you think you’ve demonstrated loyalty and caring to your family, and the co-sign seems like the best alternative. Until the kid drops out, or gets sick, or can’t get a job that will cover the loan payment. But with a little longer time horizon of consequences, you might have (should have) concluded differently.

I’d propose that, in many financial decisions and also the one Comey made, it would have been better to cast the situation in a slightly different role: choose the best alternative among the ones available to you. (Note: this is NOT the theoretical best that could possible exist in some alternate universe, but what’s available to you at the time.)

Phrasing a decision this way often opens up more options than either/or. Comey has repeatedly said there were only two doors he could open, and he chose the least bad. Had he instead considered the “best available” he might have waited until the emails had been reviewed, taking the long view that going off half-cocked had a very good chance of electing a president far more profoundly careless than the woman he was investigating. And since, at the time he was also beginning the Russia probe, he might have considered several other available alternatives: reveal everything about everyone if you’re choosing to disclose unfinished investigations, or wait until investigations actually have evidence before disclosing anything at all, or valuing the good of the country even beyond the supposed impact on the reputation of the FBI (which hasn’t always been stellar for non-partisanship; I’m looking at you, J. Edgar Hoover). These would have required taking a longer view, and perhaps a higher loyalty.

Similarly, the financing-of-college decision can look a bit differently when we look for best available and take a longer view. Here, best available might be negotiating with the school, taking a gap year for the student to earn money, going with the school you can pay for, or having a serious discussion with the student about the possibilities and drawbacks of taking on debt for which they alone will be responsible. It may be deciding to rein in spending (if possible) so that you might help the student pay off debt if and when they graduate. Asking “best available” rather than “least bad” seems, to me, to generate more possibilities.

Comey, and all of us, have made decisions which were agonizing at the time, still seem like they were the only possibility, and yet are tortured by the consequences. The decision to pay off loans or credit cards rather than save for retirement, stay with the spouse for the children, invest in your brother’s now-failed business, report a sexual harasser to the ruin of your career, and dozens of other life decisions that seemed right but have terrible consequences, are simply unavoidable over the course of a life. We can’t make it all perfect, but there is a kind of peace in knowing you chose the best available to you at the time.

So too with investments. No one makes an investment believing they will lose money. But you have a much better chance if you’ve balanced all the alternatives and made the best choice available based on your research and belief in the future. And, you insure your decisions if you consider multiple alternatives rather than a hot tip, and act out of careful consideration and a long view rather than fear, desperation, or unwarranted pessimism.

 

Financial planning and college acceptance

If you have a senior in high school, this is an anxious time. College acceptances and rejections are rolling in, and it’s tough. It’s an emotional drain and the decision can have a huge impact on your finances well into retirement. So, some points to ponder:

Accept a college you can afford. Unless you have significant savings, current high income, or significant financial aid, a state school is going to be most people’s best financial option. The cost of attendance at private schools has become breathtaking—four years at Northwestern is going to cost around $300,000. Four years at the University of Illinois is probably going to be less than $200,000. Consider carefully whether an undergrad degree is really worth that extra $100K.

Think about graduate school when you think about college. The $100K difference between the above two schools can pay for a professional program at some grad schools, and make a pretty good dent in even an MBA or legal program. People rack up the big bills for graduate programs, so you probably don’t want the student to take out huge loans as an undergrad. Also, for many jobs the most important degree is the last degree, so getting into a big name graduate school may be better money invested.

Make a commitment to a finished degree in four years. You’re throwing money away if you don’t get that degree. Finishing with diploma in hand from a less-than-ivy-league school counts a lot more than a year or two at Brown or Yale. A lot of people can get an admission, but fizzle. A degree measures something of real importance—that you can finish what you start. Maybe it’s heresy, but I also don’t believe you have to keep switching to find the “perfect” major—just do it. You have the rest of your life to refine it, take more classes, and study. Switch majors only if it doesn’t add more time to getting your degree.

Make the best of it. If you can’t be at the school you love, love the one you’re with. No matter where you go, you can find a niche. And no matter where you go, your dorm will have some really obnoxious residents, the food will suck, some of the extra-curriculars will be great and some not so much, and there will be campus traditions you’ll either love or think are stupid. People will have really annoying politics.

I highly recommend parents get behind whatever school—buy the mug, the tshirt and the bumper sticker and follow the news about the campus. Your student needs your support, even if they scoff at it, and even if the school wasn’t what you might have hoped for. Once on campus, most students forget all about wherever else they theoretically could have gone—just get over it.

As a corollary—don’t listen too much to your student’s complaints. With what we were spending for college, Spartan mother that I am I handed my kid her shield and told her, with it or on it!  Finish in 4 years or don’t come home. Sure, there were plenty of problems at school, but nowhere near as many as she would have had by dropping out with $100K spent and no degree. It’s a great step toward adulthood to find out that everything isn’t perfect, everyone doesn’t think you’re a genius, and you’ll actually be judged on your work.

Is there a difference? Yeah, there’s a difference between a mediocre state college and one at the tippy top of the college ratings (I’ve graduated from both). The quality of your peers, and the education they come with, will likely be better on average (but not for everyone). A top college will have higher expectations for student success (and probably a much heavier workload). And most top schools have a higher completion rate, although the breakdown rate can be pretty significant.

But I’ll still maintain that it depends as much on who you are as where you go. I’ve seen clients with liberal arts majors from indifferent universities earning $200K 5 years out, and ivy grads as unpaid interns in video production.  A top school can be shorthand for smart, but so can writing a book, founding a company, or inventing a product or service. And, as an aside, for at least the past 44 years, no one has ever asked me what my grades were—so beyond getting into grad school, I don’t think that matters at all, except insofar as it helps measure what you actually got in the way of education for your money.

I also think it’s fine to major in whatever you want as an undergrad, but only if you have a plan as to how you’re going to be employed or get into a grad school. I don’t think a major or a college program should be exclusively a trade school training, but you should also come out with a marketable skill or two. Take a business, or computer, or health minor, or get a campus job managing something or doing web design–whatever makes sense, but with a strong eye to how you’ll use it to pitch an employer.

It’s a tough time, and for most students the reality is some rejection. But as a parent, don’t let too much emotion cloud the selection. Balance dreams against financial reality, and try to make reasonable choices.