Thread by @roncaruthers

1. Where is the best place to save money for your kids college education?

A few weeks ago (3, to be exact), I wrote this thread on why a 529 is NOT always a good idea.

Here it is if you missed it:

https://twitter.com/roncaruthers/status/1266395293429297152

2. So...since you likely do NOT want to put money into a 529, where else CAN you put money?

And, how can you do it in a way that maximizes your chances of getting merit or need based aid,

Let's go!

3. First, the 'second most popular' way to save money for college sucks too.

That is in an UTMA or UGMA account.

It stands for Uniform Transfer to Minors Account or Uniform GIFT to Minors Account.

Here's why it completely sucks...maybe even WORSE than the 529.

4. First, it counts against you 20% from dollar ONE in the financial aid formula.

SO: if you save $10,000 in one of these accounts, you will lose $2,000 a year from what you should get, if you're otherwise eligible for aid.

And most people are.

Even if they make six figures.

5. And no, you're not 'taking money from the people who really need it' like a couple of socialists or communists mentioned when I wrote the original article.

Most colleges have TONS of money.

But.....

6. ...But, like you, they'd rather keep it for themselves, so if you give them a reason to, they will.

But, you being smart with YOUR money based on what I'm telling you is NOT going to mean some poor inner city kid has to stay home.

OK, where was I?

Oh yes, why UTMA's suck.

7. Since most kids go to college for 5 years, and they're taking 1/5 of your UTMA money each year,

If you're good at math, you just realized, they expect you to give it ALL to them.

And, that's a problem.

8. But even worse are a couple of other rules with these accounts.

For one, the money becomes the LEGAL property of your child as soon as they're 18.

So, if they want to blow it on a Harley or tattoos instead of college, LEGALLY, there is nothing you can do about it.

9. That doesn't mean you have to TELL them about the account, or that you can't go old school and NOT give them the money, but LEGALLY, it's now THEIR money to do with as they please.

And, you don't even get a tax break on these things.

10. The money USED to get taxed at the kid's rate once the kid is 14.

Now, they tax it at the parent's rate until your kid is 24.

Yes, this makes no sense....which is why I hate these accounts.

Oh, and briefly, they wanted to tax them at an even higher estate tax rate.

11. Here is an article from @Forbes explaining some of the games Congress plays with these accounts.

forbes.com/sites/leonlabr…

12. OK, next up: a prepaid tuition plan for your state.

Unlike 529 plans, THESE plans are awesome....

....if your kid wants to go to school in state.

So, I'm a big fan of these. Check out and see if your state has one.

If you have questions, DM me, but I like these plans.

13. Education IRAs?

Nope. These are just ugly 529's.

Lower contribution limit ($2,000 a year), the money HAS to be distributed to the child after college (unlike a 529 that you can use for another kid),

And they still count against you in the formula.

14. How about a regular brokerage account?

I actually LIKE this one.

Here's why:

First off, you can use it for ANYTHING, not JUST college.

And, here is something to consider:

If you're married, and you make $80,000 or less, your capital gains rate is ZERO.

15. So, you get the benefit of a 529 by more or less getting a 0% tax rate on your distribution.

BUT, you avoid all the other garbage that comes along with a 529 like higher fees and weird college formula treatment.

16. Even if you make more than 80k, you get a lower capital gains rate than your income rate, so you will save money.

However, if you have too much money, they will penalize you anyway, just not as bad as a 529.

17. How much is too much?

Depends on your income, but lets say anything above $60,000 combined,

so that would include your other non retirement money as well.

But, this isn't a bad strategy that gives you a lot of control.

18. BTW, if you own a business, you can put the brokerage account in the name of the business, and, unless you have more than 100 employees, that amount will NOT count against you.

This comes directly from the Department of Education's paperwork.

19. So, if you want to purchase index funds, have a managed account, or buy individual stocks, this can be a great alternative.

You can also fund a ROTH IRA for college, withdraw the principal tax-free, and then let the earnings grow for your OWN retirement.

Read that again. 👆

20. And a Roth IRA balance does NOT count against you in the formula.

Only the income that you withdraw does....but if you withdraw money during the last 2 years of your kid's education, it won't matter....because they 'look back' 2 years.

21. I write a lot about a properly structured cash value life insurance account.

Believe it or not, this works VERY well here, IF you have time...let's say 5 or more years...until your child goes off to college.

Here's why: you get tax free growth and distributions

AND...

22. It does NOT count against you in the formula, even when you take the income.

AND, you can get the upside of the market, but none of the downside, so unlike a 529 or index funds,

You don't have to worry about the market taking right before your kid is supposed to start.

23. Finally, an annuity is exempt from the financial aid formula as well, so this could, in theory, be used, but it's really not anything I would ever recommend.

BTW, annuities get a bad rap.

They can be AMAZING for retirement.

You can get lifetime, increasing income.

24. So, what would I recommend you do.

Here's my list:

First, you need to determine if you have any shot at ALL of getting need based or merit aid for college.

I have a class that explains the basics.

You can watch it here.

25. If you have UTMA's or UGMA's, I would NOT fund them anymore for sure.

And, if you want to chat about what to do with them, hit me in the DM's.

What I WOULD consider are the following:

-A Roth IRA
-A brokerage account
-An IUL (if you have at least 5 years)

26. Oh, IUL stands for Indexed Universal Life Insurance.

Again, it's an exempt account, and if it's properly structured, it can work amazingly well.

But, it is certainly NOT your only good option here.

27. Finally, some parents need to refinance their house to be able to afford college.

The Catch 22 is that if you put the money in the bank, they're going to 'penalize' you for planning ahead.

So, we use something called a 'Modified Endowment Contract' to hold that money.

28. So, my recommendation is to watch the video if you have kids (it has one whole thumbs up!)

Then, if you want to chat, shoot me a DM.

BTW, I've been a little lax on those lately, but I'll go through them over the weekend.

Hope this helps.

/end.

29. Addendum:

The idea of having a business 'hold' the money is a legit strategy that I've used for years.

You don't want the money there if you have tons of liability, but don't overlook that one.

Also, I'll be out this evening, so I'll respond to comments and q's in the am.

30. Oh, and if you watch the YT video, be sure to like it, please.

That poor video can't just sit there forever with ONE measly like!